Federal Council takes decision on measures to strengthen Switzerland's financial system
Bern, 16.10.2008 - The Federal Council, the Swiss National Bank (SNB) and the Swiss Federal Banking Commission (SFBC) have decided on a package of measures to further stabilise the Swiss financial system and to sustainably strengthen confidence in Switzerland's financial market. The Federal Council is confident that this package of measures will contribute to the lasting strengthening of the Swiss financial system. The resulting stabilisation is beneficial for overall economic development in Switzerland and is in the interests of the country as a whole.
The Federal Council has instructed the Federal Department of Finance (FDF) to submit a dispatch for the winter session of parliament designed to immediately strengthen depositor protection. Furthermore, the FDF will have to submit a proposal to the Federal Council by the end of March 2009 on a fundamental revision of the deposit-guarantee system. In addition, the Confederation and the SNB will undertake two coordinated measures to strengthen the UBS balance sheet:
- the SNB will create the possibility of transferring illiquid assets for orderly liquidation to a fund entity.
- the Confederation will strengthen the UBS capital base by subscribing to mandatory convertible notes (MCN) to the amount of CHF 6 billion. The loan required was approved by the Finance Delegation.
Together with the capital increase announced today by Credit Suisse and implemented in the market, significant steps are being made towards the strengthening of capital in the big banks announced by the SFBC.
Strengthening depositor protection
In a two-phase process the Federal Council has instructed the FDF to improve the Swiss depositor protection system. As an immediate measure, the Federal Council wants to submit a dispatch to parliament in the winter session, which envisages a moderate increase in the protected deposits and the system limits. Work on the precise determination of the new values is already under way, although the decisions taken by the EU member states will serve as an important benchmark. The FDF will draw up the dispatch involving the circles concerned.
In a second phase, the deposit guarantee scheme will undergo a thorough revision. The Federal Council expects to see a reform proposal from the FDF by the end of March 2009 at the latest.
UBS package of measures
The balance sheet of UBS which has been particularly affected by the crisis is to be strengthened as a result of two coordinated measures on the part of the Confederation and the SNB. On the one hand, the balance sheet of UBS is to be relieved of illiquid assets. In addition, the SNB has concluded a basic agreement with UBS on long-term financing and on the orderly liquidation of illiquid securities and other assets to the value of up to USD 60 billion. As a result, UBS will be relieved of considerable risks in the form of other valuation adjustments.
In order to limit the risks for the SNB, UBS will create an entity funded with equity capital of USD 6 billion. Initially this will serve to cap losses. This transaction must be value adjusted creating a capital requirement for UBS which was set by the SFBC at CHF 6 billion.
Consolidation of capital base
Due to the fact that there are currently no sufficiently binding undertakings from the private sector to raise the necessary capital given the difficult market climate, the Confederation will reinforce the bank's capital base by subscribing to mandatory convertible notes to the value of CHF 6 billion. With a conversion price of CHF 20 the participation of the Confederation would amount to approximately 9 per cent of the UBS capital stock after any conversion.
The advantages of mandatory convertible notes are as follows:
- high transactional security
- the Confederation will not immediately become a co-owner of the bank and also has the possibility of withdrawing from its commitment during the term of the loan
- commensurate and secure compensation for the Confederation for its commitment (coupons of 12.5%)
The Federal Council will participate in this package of measures under the following conditions:
- The commitment of the Confederation will not lead to a lasting rise in debt. As with other extraordinary expenditures, the expenditure for the involvement will be compensated for using structural surpluses in the normal budget. Thus interest payments and any sales revenues will be able to be calculated.
- The commitment will be limited to the necessary level. The participation of the Confederation should complement other investors as far as possible and not replace them.
- The Federal Council does not regard the participation as a long-term commitment on the part of the Confederation. Taking into account market conditions, it will sell this on to private investors as soon as possible. In doing so it will observe commercial criteria.
- The Confederation will be appropriately compensated for the risk taken.
- The participation of the Confederation will be linked to obligations concerning compensatory policies (bonuses and severance pay).
- For the duration of the participation of the Confederation, regular investment discussions with the Confederation and reviews of risk management and risk controls by the SNB are envisaged.
The legal basis for the measure on strengthening the capital base is provided by an ordinance in accordance with Art. 184 para. 3 and Art. 185 para. 3 of the Federal Constitution. The Federal Council takes into account the urgency of the capital increase in view of the unfavourable developments in the financial markets. The authorisation of the required loan was given with the approval of the Finance Delegation. It will be submitted to parliament for subsequent approval.
Transfer of problematic assets to the SNB
The transaction is also relieving UBS of problematic assets of up to USD 60 billion. These positions will be sold by UBS to a fund entity. UBS will provide this fund entity with equity capital of up to USD 6 billion. With a secure loan to the fund entity the SNB is financing up to USD 54 billion. To finance this loan to the fund entity, the SNB will not use any of its own assets or currency reserves. It will finance the loan by raising US dollars initially with the US Federal Reserve and later directly in the market. The fund entity will charge interest commensurate with the risks and compensates the SNB for the risks involved.
As collateral, the SNB will have ownership of the assets and control of the fund entity, as well as the overwhelming share of the equity in the event of positive performance. The transferred assets consist primarily of loans underlayed with US and European residential and commercial real estate mortgages. The underwriting price is to be determined on the basis of the current book value of the assets and on the basis of an independent evaluation. The entity will pay the lower of the two prices. The transfer of assets to the fund entity and the administration and liquidation of the assets will be supervised by the SNB.
The SNB and the Federal Council believe that the longer term dividend payment potential of the SNB will not be affected by these measures. The Federal Council has instructed the FDF to draw up possible solutions with the cantons for more appropriate burden sharing in the event that the SNB's current dividend agreement with the FDF can, despite expectations, no longer be guaranteed as a result of the measures.
Increase in equity capital
Following the first experiences of the financial crisis, the SFBC in autumn 2007 raised the target value for supplementary capital requirements (Pillar 2) above those of the minimum requirements (Pillar 1) of Basel II. It now intends to introduce an additional capital buffer, which should better cover the systemic risks of the big banks. This further tightening of the capital requirements should go beyond the existing Swiss requirements and the planned tightening of conditions of the Basel Committee. The SFBC also intends to introduce a leverage ratio. This should act as a buffer against losses resulting from a false assessment of risks and which are not adequately covered by the requirements of Basel II.
The recapitalisations of the two big banks communicated today mark a significant step towards the renewed strengthening of capital requirements.
Confidence as a key factor
The financial system makes an essential contribution to the functioning of the Swiss economy and thus to employment and growth. The current financial crisis could significantly impact on this key economic function of the financial system.
The Federal Council and the SNB will therefore continue to take all necessary measures to ensure the stability of the financial system. The package of measures announced today significantly contributes to safeguarding financial stability in Switzerland and to restoring confidence in the financial system.
The Federal Council has considered all eventualities. In the event that refinancing problems should emerge for Swiss banks, the Federal Council is prepared to guarantee new short and medium term interbank liabilities and the money market transactions of Swiss banks. The amount guaranteed for this purpose would depend on the specific needs of the banking system. The aim of such a measure would be to facilitate the refinancing of the banks. The exact modalities of this solution would be decided swiftly and communicated accordingly.Confidence is the foundation for re-establishing the stability of the international financial markets - and thus also of the Swiss financial market. The Federal Council, the SNB and the SFBC are committed to tackling the causes of this loss of confidence. In so doing, they wish to prevent the Swiss economy as a whole from being harmed. The stability of the national and global banking system is of the utmost importance for the Swiss economy. The Federal Council is convinced that this package of measures is capable of protecting the whole of the Swiss financial market against external shocks and thus contribute to the lasting strengthening of Switzerland's financial system. The resulting stabilisation is beneficial for overall economic development in Switzerland and is in the interests of the country as a whole.
Address for enquiries
Peter Siegenthaler, Director, Fed. Finance Administration, 031 32 26005