Switzerland: Liquidity Aid for UBS and Credit Suisse “Not a Bailout”

World | March 20, 2023, Monday // 08:16|  views

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Swiss Finance Minister Karin Keller-Sutter said the government's decision to provide liquidity support to UBS Group AG and Credit Suisse was made with the aim of maintaining financial stability and not simply a desire to save a troubled institution.

She highlighted the high cost of a possible Credit Suisse bankruptcy to the Swiss economy and noted that a potential bankruptcy would pose a contagion risk to other banks, both at home and abroad.

The minister's comments came after the Swiss National Bank announced it was providing "significant liquidity support" to support UBS Group AG's acquisition of Credit Suisse.

UBS has acquired Credit Suisse for 3.0 billion francs ($3.23 billion), representatives of the two Swiss banks said on Sunday. The Swiss central bank opens a credit line of 100 billion francs. The federal government has guaranteed an additional 9 billion francs to UBS in case the Swiss central bank incurs losses from the deal.

UBS will pay about 0.76 Swiss francs per share in the form of 3 billion francs worth of treasury stock, compared with an offer of 0.25 francs per share earlier on Sunday worth about $1 billion, which was rejected from the board of Credit Suisse. However, UBS's latest offer remains well below Credit Suisse's closing price of 1.86 francs on Friday.

As part of the deal, the Swiss central bank agreed to offer a 100 billion franc liquidity line backed by a federal default guarantee to UBS, the Swiss finance ministry said. The government is also providing guarantees against losses of up to 9 billion francs, but only after UBS assumes the first 5 billion francs of losses on certain portfolios of Credit Suisse assets.

The deal will create one of the largest banks in Europe. UBS has total assets of 1.1 trillion on its balance sheet. dollars, and Credit Suisse - for 575 billion dollars.

Shares of Credit Suisse have fallen more than 74 percent over the past year, leaving its market capitalization on Friday at just $8 billion, smaller than UBS's roughly $57 billion market capitalization. This became a fact after customers of the bank withdrew funds for 111 billion francs in the last three months of last year. The outflow of deposits from Credit Suisse at the end of last week exceeded 10 billion Swiss francs per day.

Meanwhile, in 2022, UBS posted a $7.6 billion profit, while Credit Suisse posted a $7.9 billion loss, completely erasing all of the previous decade's gains.

For UBS, the deal cements its position as the world's largest wealth manager with operations spanning the US, Europe, the Middle East and Asia. The combined banking institution will have 5 trillion dollars in invested assets worldwide.

The actions of the Swiss authorities were welcomed by the Federal Reserve and the Treasury Departments of the United States and Great Britain.

The president of the European Central Bank, Christine Lagarde, welcomed the "swift action" of the Swiss authorities. "The banking sector in the Eurozone is resilient, with strong capital and liquidity positions," she assured.

Meanwhile, the US Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank announced that they are taking action to improve liquidity provision through standing dollar liquidity through negotiated swap agreements.

"To improve the effectiveness of swap lines in providing funding in US dollars, central banks that currently offer dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily," the central banks said.

The operations will begin on Monday and continue "at least" until the end of April.

They explained that the swap line network "serves as an important liquidity backstop to ease tensions in global funding markets" and "helps mitigate the effects of such tensions on the supply of credit to households and businesses".

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Tags: Swiss, bank, UBS, Credit Suisse


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