UBS and the Swiss government have solidified an agreement to insulate UBS from potential losses tied to its impending takeover of Credit Suisse.
The deal, signed on Friday, positions the government as the safety net for UBS, agreeing to absorb losses up to 9 billion Swiss francs (approximately $10 billion) linked to specific Credit Suisse non-core assets.
UBS’s protective agreement
The agreement is slated to be activated upon the completion of UBS’s acquisition of its erstwhile competitor, Credit Suisse. The Swiss government will absorb the financial losses, yet the first 5 billion Swiss francs of any loss will fall squarely on UBS.
The primary focus of both the company and the Swiss government is to sidestep any potential losses and risks tied to the takeover. The federal government, through this agreement, aims to circumvent any need for a federal guarantee as much as possible.
It has provided the assurance of absorbing part of the losses, a bold step taken by the government to uphold financial stability and shield the Swiss economy from any detrimental impact.
In exchange for this governmental backstop, UBS is expected to champion the progress of Switzerland’s reputation as a financial hub. The bank has already declared that the merged group’s headquarters will remain in Switzerland for the duration of the loss protection agreement.
UBS is committed to managing the non-core assets from Credit Suisse in a cautious and attentive manner, seeking to mitigate losses and bolster value realization.
UBS had previously forecast a hefty financial impact amounting to approximately $17 billion due to the takeover of Credit Suisse, an acquisition some observers have branded a “shotgun wedding” aimed at stabilizing the Swiss financial system.
The impact of the takeover
The purchase of Credit Suisse was settled in the early spring for $3.2 billion, amidst a period of widespread turbulence in the banking sector. This instability led to the collapse of three U.S. banks and came hot on the heels of Credit Suisse shares plummeting in early March.
Credit Suisse, beleaguered by years of alleged scandals, losses, and mismanagement, reached a crisis point when its primary shareholder, the Saudi National Bank, revealed it was unable to inject more cash into the bank due to regulatory limitations.
The merger of these two banking powerhouses has not been without controversy, eliciting outrage from Credit Suisse shareholders and bondholders and sparking concerns about competitive practices.
Nonetheless, UBS anticipates finalizing the Credit Suisse acquisition as early as June 12, marking a new chapter for the Swiss financial system.