Financial risk for taxpayers? This is what you need to know about the CS takeover

As the Federal Council announced on Sunday evening, it welcomes the planned takeover of Credit Suisse by UBS. “The private takeover of Credit Suisse by UBS, supported by state-guaranteed liquidity support, strengthens confidence in the financial system and creates stability for the Swiss economy and the Swiss and international financial system,” says a press release. In order to enable the takeover of CS by UBS, the Confederation is assuming a loss guarantee of a maximum of nine billion francs on a clearly defined part of the portfolio. All foreign supervisory authorities involved considered the Swiss authorities’ approach to be expedient. This will also calm the international financial markets.

According to the Federal Council, UBS is taking over valuable assets from Credit Suisse as well as a portfolio of assets that are difficult to assess. “UBS will scale down this portfolio over time. This can result in losses,” the statement said. UBS is willing to bear a large part of the losses. Only after UBS has borne losses will another part of the loss absorption guarantee be covered by the federal government. In the unexpected event that losses continue to increase, UBS and the FDF will examine the creation of a profit-loss share agreement with symmetrical profit and loss sharing.

As the communication states, the Federal Council has taken precautions to keep the risks for the federal government as small as possible. For example, the SNB is granted a bankruptcy privilege for the liquidity assistance loans secured by the federal government. Furthermore, remaining risks have to be compensated. Credit Suisse would have to pay a risk premium to the Confederation and the SNB, a commitment premium to the Confederation for providing the default guarantee, and interest to the SNB. Together with the bankruptcy privilege, this results in a low default risk for the federal government.

According to the Federal Council, the payment of dividends for Credit Suisse is not permitted during the period of government support claimed. In addition, the Federal Council is ordering measures in the area of ​​remuneration in accordance with the Banking Act. The payment of variable remuneration can therefore be prohibited in whole or in part.

According to the Federal Council, the possibility of state-guaranteed liquidity assistance is being prepared in Swiss legislation, but is not yet in force. Therefore, this had to be regulated by emergency law in order to ensure the stability of the Swiss economy and the financial system.

“The too-big-to-fail measures are suitable for reducing the likelihood of state intervention. The stability of the Swiss financial sector as a whole is also due to these measures,” the statement said. In the event of dramatic and rapid outflows of money, however, Credit Suisse would lose confidence within a very short time, despite having sufficient capital and high liquidity for a long time, and would be threatened with bankruptcy.

According to the Federal Council, there are no signs of such a development in Switzerland. As stated in the communication, however, the relevant regulations and instruments exist.