FREE

Switzerland's Efforts to Protect Financial Stability Increase Contingent Risks

UBS will pay CHF 3 billion to acquire Credit Suisse. In addition to the Swiss National Bank's (SNB) existing liquidity facilities, a CHF 100 billion liquidity assistance loan from SNB to Credit Suisse and UBS, with preferential creditor status in bankruptcy, has been made available. Also, in order to facilitate the takeover, the Swiss federal government will provide to the SNB a loan guarantee based on a Public Liquidity Backstop (PLB) facility of up to CHF 100 billion for Credit Suisse. Furthermore, the Swiss Confederation will provide a CHF 9 billion guarantee to UBS to cover any potential losses that emerge from acquiring part of Credit Suisse's portfolio. If losses were to occur on certain assets that UBS will acquire, UBS would be required to cover the first CHF 5 billion and the federal government would cover an additional CHF 9 billion, the latter amounting to just over one percent of GDP.

Switzerland's wealthy and diversified economy, strong fiscal position, and low public debt ratio provide buffers to withstand a substantial shock in excess of the explicit support the government has offered to UBS and Credit Suisse. However, the recent instability in the Swiss financial system exposes some of the risks emanating from its large banking sector, estimated at around 520% of GDP. The merger of the two banks will most likely result in output and job losses as Credit Suisse employs approximately 16,000 people in Switzerland, and there will be secondary effects. The impact on public finances is likely to be manageable, but will depend on the outcome and success of the merger plan. This operation and the creation of a larger financial institution materially will increase concentration in the Swiss banking system, which could ultimately increase contingent liability risks attached to a single bank.

“Given the likelihood that restructuring efforts could take several years to complete, we will continue to monitor the ongoing situation, in particular for the crystalisation of contingent liabilities or new risks that could damage public finances or create material downside risks to growth prospects,” said Spyridoula Tzima, Vice President of the Sovereign Group at DBRS Morningstar.