Switzerland Gives $10B Loss Guarantee to UBS for Credit Suisse Takeover

The Swiss government has sealed a deal with UBS to cover up to CHF 9 billion ($10 billion) in losses that might be incurred by the global lender due to its liquidation of rival Credit Suisse’s assets.

The government had brokered UBS’ emergency acquisition of Credit Suisse for CHF 3 billion earlier in March to prevent a Swiss banking and economic crisis. At the time, the federal government assured it was ready to shoulder a portion of any losses incurred from the sale of the troubled lender’s assets.

UBS, Swiss Govt Sign Agreement

On Friday, the government agreed with UBS that to cover losses more than CHF 5 billion and up to CHF 9 billion. The move is believed to be the last major hurdle facing UBS’ takeover of Credit Suisse.

The guarantee covers only loans, derivatives, legacy assets and structured products portfolio from Credit Suisse's non-core unit. However, the portfolio, worth about CHF 44 billion, makes up only about 3% of the two banking giants’ merged assets.

The Swiss government in a statement noted that the deal will become active once the acquisition of Credit Suisse by UBS is completed. The takeover is expected to be finalized next Monday, transforming UBS into a financial powerhouse worth twice the Swiss economy.

However, the loss protection agreement comes with several conditions, including UBS establishing an appropriate organizational structure in the form of a separate organizational unit and maintaining its headquarters in Switzerland. In addition, UBS, in order to exercise the guarantee fund, is required to pay several fees, including an initial set-up fee of CHF 40 million.

“The priority for the federal government and UBS is to minimize potential losses and risks so that recourse to the federal guarantee is avoided to the greatest extent possible,” the Swiss government noted.

Meanwhile, the Swiss Federal Council recently moved up the end date of its consultation for a planned public liquidity backstop for systemically important banks. The decision was taken in light of the Credit Suisse fiasco.

Credit Suisse, an already-troubled Swiss banking giant, collapsed in March after its shares plunged to an all-time-low in the wake of the recent banking crisis in the United States. However, Swiss authorities offered a rescue package to the lender in a rushed deal, bypassing the legislature and angering Swiss lawmakers.