UBS agrees £8bn loss protection deal with Swiss authorities

In preparation for the impending merger of Switzerland’s largest banks, UBS has finalised an £8bn loss protection deal with Swiss authorities, amounting to CHF9bn. This agreement paves the way for the merger set to take place next week.

Under the terms of the arrangement, UBS will initially bear CHF5bn of potential losses on a defined portion of Credit Suisse’s assets. Following UBS’s coverage, the Swiss government will step in to assume responsibility for the subsequent CHF9bn.

The primary objective behind this agreement is to ensure that potential losses do not burden taxpayers. UBS has stated its commitment to managing non-core assets in a prudent and diligent manner, aiming to minimize losses and maximize value realization.

Additionally, UBS will shoulder both the initial and ongoing external costs associated with this agreement, which will come into effect upon the completion of the acquisition.

Negotiations between UBS and the Swiss authorities have been ongoing since the takeover, with a focus on determining the extent of government support.

Engineered by Swiss authorities in March, this deal was designed to prevent a broader financial crisis and marks the largest banking merger since 2008. The merger will result in the formation of a banking behemoth, boasting over $5trn in assets, which is twice the size of Switzerland’s GDP.

Due to the accelerated completion of the deal, UBS was unable to conduct a thorough due diligence process. As a result, UBS has sought protections against potential losses stemming from certain assets in Credit Suisse’s portfolio that it intends to divest.

UBS estimates that the takeover of Credit Suisse will result in a substantial $17bn impact, comprising a $13bn hit from fair value adjustments and an additional $4bn in potential litigation and regulatory costs. This projection has already sparked challenges from politicians and lawyers, who are particularly concerned about the contentious erasure of Credit Suisse’s AT1 bonds. Nevertheless, despite the complexities and costs involved, analysts remain optimistic about the merger, highlighting the significant opportunities it presents for UBS, particularly in the realm of wealth management.