What haven't the Swiss government and authorities done to sweeten the takeover of Credit Suisse by UBS? Now it's apparent the new entity doesn't have to fully secure its balance sheet until the end of 2029, finews.asia has learned.
A magnifying glass and some patience are needed to dig out the relevant passage which can be found on page 19 of the form that UBS filed yesterday with the US Securities and Exchange Commission (SEC) regarding the status of the Credit Suisse acquisition. It reads:
«In connection with the merger, and following discussions with UBS Group, FINMA has confirmed that increases in UBS Group’s prudential capital surcharge based on market share in Switzerland and total exposures will, in general, be phased in beginning after the end of 2025 with the phase in the path to be determined based on an integration plan to be developed by UBS.»
A Big Blank Check
Additionally, UBS will be allowed to temporarily apply certain capital and liquidity arrangements previously granted to Credit Suisse. Likewise, the two banks can continue to apply existing rules and models for calculating risk-weighted assets until further notice.
This is the first detailed explanation that expands on what Finma briefly said on March 19 «The takeover will result in a larger bank. The existing regulation provides for higher capital buffers for this. Finma will grant appropriate transition periods for their build-up.»
To not jeopardize the takeover's success, the combined UBS-CS was additionally granted a moratorium on capital adequacy requirements until the beginning of 2026. After that, the screw will be tightened, but only gradually. UBS is also allowed to make accounting adjustments until June 2027 to compensate for valuation losses on Credit Suisse's balance sheet.
Altogether, it's an impressive blank check that will surely be the subject of much discussion.
Progressive Increase Prescribed
The capital adequacy ordinance enshrined in the law stipulates that banks must hold progressively more capital as they get bigger. Until now, both banks had a minimum hard-equity ratio of ten percent. According to the letter of the law, a larger bank with a bigger balance sheet should have a higher ratio. But UBS has a reprieve from that until the end of 2025.
«We can confirm, as previously announced, that after an appropriate transition period, the higher too-big-to-fail capital requirements due to the progressive component will fully apply to UBS,» a Finma spokesperson said in response to a question.
The capital build-up that will happen gradually from the end of 2025 will be completed by the beginning of 2030 at the latest, a necessary transition period necessary to enable the planned risk reduction to proceed in an orderly manner.
Investment Bank Risk Fixation
It is highly unlikely that UBS will be smaller after the planned completion of the takeover than it is today. CEO Sergio Ermotti recently stated that Switzerland needs even bigger banks in order to compete internationally as a proper financial center.
It's true the share of investment banking in the risk-weighted assets of the new UBS is to be reduced from the current level of around 30 percent to 25 percent, falling mostly in investment banking. It wasn't inadequate capital that brought down Credit Suisse, but rather a classic bank run in the private banking unit.
The equity and liquidity moratorium is at odds with the debate currently raging in parliament. On both sides of the political spectrum, there are calls for no more government bailouts and higher equity buffers of at least 20 percent. The Social Democratic party went so far as to demand a bank's total assets not exceed 50 percent of Swiss GDP.
Legislation Takes Time
Realistically, the legislative process for new capital adequacy regulations will likely go beyond 2025. Parliamentarians startled by the second big bank bailout within 15 years will certainly not like the fact the new «monster bank» has the option to fully secure its balance sheet by the end of 2029.
This is all the more true because the buffers granted to UBS are already substantial. In the rescue package, the federal government committed itself to guarantees for a total of 109 billion Swiss francs ($120 billion), 100 billion to the SNB, and 9 billion francs to UBS for any losses from the sale of securities in the Credit Suisse portfolio that prove difficult to assess. The guarantee and profit and loss allocations beyond those already agreed to will be finalized today.
Enormous Risk?
The SNB has granted three liquidity assistance loans for the rescue of Credit Suisse, totaling 250 billion francs. The Emergency Liquidity Assistance Plus loans (ELA+) totaling 100 billion francs are granted by the SNB at its own risk. A further 100 billion is guaranteed by the Swiss government. Shortly before the takeover, the SNB granted an interest-free loan of 50 billion.
The write-off of 15.8 billion francs on Credit Suisse's mandatory convertible bonds ordered by Finma and the bargain purchase price of three billion also provide a cushion to minimize UBS's risks in the deal.
