In March 2023, Credit Suisse was experiencing an acute crisis of confidence. The Federal Council, the SNB and FINMA therefore had to intervene at very short notice in mid-March to protect the Swiss economy and avert damage. On 19 March 2023, the Federal Council adopted a package of measures that enabled the takeover of Credit Suisse by UBS. Thanks to the swift takeover by UBS and the accompanying government measures, it was possible for the financial system to be stabilised for the long term. The package of measures in connection with the takeover of Credit Suisse by UBS included, among other things, a federal loss protection guarantee for UBS in the amount of CHF 9 billion and a guarantee of CHF 100 billion in favour of the SNB to secure liquidity assistance loans.
On 11 August 2023, UBS announced the termination of the federal loss protection guarantee without replacement. At the same time, it also ended, without replacement, the agreement between Credit Suisse and the SNB on liquidity assistance loans with a federal default guarantee, following full repayment of these loans. The termination of the federal loss protection guarantee and the liquidity assistance loans with a federal default guarantee is final.
The Confederation did not have to assume any losses arising from these guarantees. With the termination of these guarantees, the associated risks have also ceased to apply for the Confederation and taxpayers.
The private takeover of Credit Suisse by UBS, supported by a public liquidity backstop, strengthened confidence in the financial system and created stability for the international financial system, thereby averting serious consequences for the Swiss economy, while at the same time keeping the cost for the state and taxpayers as low as possible. All of the foreign supervisory authorities involved viewed the Swiss authorities' action as appropriate. It also provided reassurance to international financial markets.
Bankruptcy of a systemically important bank like Credit Suisse would have had drastic consequences for Switzerland. Banks in general, but systemically important banks in particular, are key for a national economy to function, as businesses and households depend on them for their economic operations. The failure of a systemically important bank would have ramifications that go beyond the loss of tax contributions or jobs at the bank in question. First, the bank's failure would mean that hundreds of thousands of clients throughout Switzerland – including many SMEs – would lose access to a substantial portion of their bank balances and would quickly find themselves unable to meet their payment obligations. SMEs and households throughout Switzerland would have found it almost impossible to function economically. The Swiss economy would have run the risk of grinding to a halt.
In the case of globally active systemically important banks, there is also a high risk of contagion. The discovery that clients of a globally active systemically important bank are no longer able to access their assets would trigger a loss of confidence both in Switzerland and globally. Other, fundamentally "healthy" banks in Switzerland would be affected. The uncontrolled failure of a globally active systemically important bank could then trigger a global financial crisis.
Liquidity assistance and risks for the Confederation
Despite the bank's own liquidity supply and the SNB's extraordinary liquidity assistance, incidents may occur that can lead to an abrupt loss of confidence in the bank by market participants and thus to liquidity problems. This can be the case even if the bank meets the regulatory capital requirements. The liquidity assistance would also have been necessary under alternative scenarios such as a public takeover.
CHF 100 billion in additional liquidity assistance loans from the SNB to Credit Suisse and UBS, secured by preferential rights in bankruptcy proceedings for the SNB, but without a state guarantee from the Confederation (= additional emergency liquidity assistance, or ELA+).
CHF 100 billion in secured liquidity assistance from the SNB, secured by preferential rights in bankruptcy proceedings for the SNB, coupled with strict conditions, and by a state guarantee from the Confederation (= public liquidity backstop). The preferential rights in bankruptcy proceedings and the strict conditions significantly reduced the risk for the Confederation.
A state guarantee of a maximum of CHF 9 billion for UBS to cover any losses on the sale of specific Credit Suisse assets, consisting essentially of assets that do not fit UBS's strategy. The first CHF 5 billion of any losses on these positions would have been borne by UBS in any case.
Not part of the package of 19 March 2023:
CHF 50 billion in emergency liquidity assistance from the SNB. This is an existing SNB monetary policy instrument. Banks can access SNB liquidity against collateral (= emergency liquidity assistance, or ELA). According to its own press release of 16 March 2023, Credit Suisse accessed up to CHF 50 billion under this arrangement.
In the event of bankruptcy, outstanding loans from the SNB, insofar as these are liquidity assistance loans within the meaning of the emergency ordinance, are assigned to the second bankruptcy class and are thus repaid from the bankruptcy estate immediately after the first class (including employee wages, social security contributions). Within the second bankruptcy class, these claims are ranked after privileged liabilities (e.g. social security contributions, privileged deposits), but ahead of the remaining claims in the third bankruptcy class.
The Confederation earned receipts totalling around CHF 200 million from the state-guaranteed liquidity assistance and loss guarantee [40 mn loss guarantee, 100 mn PLB commitment premium, 60.6 mn risk premium for PLB actually drawn]. Part of this amount has already been paid, the rest is due this year. This covered expenses incurred by the Confederation for consultancy services provided by external experts in the context of the UBS guarantee.
Internationally, a public liquidity backstop is part of the standard crisis toolkit. It can be a critical prerequisite for a systemically important bank's business continuity. Public liquidity backstops (PLBs) are based on recommendations of the Financial Stability Board (FSB), and have been introduced in different forms in various jurisdictions (e.g. United States, United Kingdom, European Union). The Federal Council had to use an emergency ordinance because Switzerland does not have a PLB anchored in law. Based on the Federal Council's fundamental decision of 11 March 2022, the Federal Council opened the consultation on the introduction of a PLB to strengthen the stability of the financial sector on 25 May 2023.
The corresponding agreements were terminated. Therefore, the Confederation no longer has any financial obligations in the form of guarantee credits. Consequently, there are no longer any financial risks for the Confederation in this regard.
At the beginning of March, Credit Suisse experienced a crisis of confidence. It was no longer able to restore market and client confidence on its own or to avoid bankruptcy or restructuring. As a result, the Swiss economy also faced unforeseeable upheaval. It was possible for these serious consequences to be averted by UBS taking over Credit Suisse. This takeover emerged as the best overall solution for financial stability and the Swiss economy. The pivotal element was the federal government's willingness to assume any losses on certain assets up to a maximum of CHF 9 billion, provided that UBS shouldered losses of at least CHF 5 billion. The loss protection agreement governed the specifics of this guarantee. The in-depth analysis of the assets acquired through the takeover of CS took time. UBS has now come to the conclusion that the guarantee is no longer necessary.
Since the completion of the takeover of Credit Suisse on 12 June 2023, UBS has been able to better estimate the actual risk of losses arising from the assets of Credit Suisse defined in the loss protection agreement. With the termination, UBS ceases to benefit from the federal loss protection guarantee for these assets. This means the Confederation has met its aim to enable a takeover of CS and stabilise the financial centre, without burdening the state.
The termination of the loss protection agreement is final. UBS has thus decided not to avail itself of the federal loss protection guarantee. The legal basis required for this (Art. 14a of the Federal Council's emergency ordinance of 16 March 2023) is limited until 16 September 2023. The Confederation cannot enter into any new loss protection agreement without a legal basis and without an approved guarantee credit.
The Confederation engaged specialised external consultants in connection with the loss protection agreement with the aim of minimising the risks for the Confederation and the taxpayer as far as possible. The costs of the external consultancy were more than covered by the set-up fee of CHF 40 million.
CHF 40 million in the form of a set-up fee. The first tranche of CHF 20 million was paid at the end of June. The second tranche is due at the end of September.
As of the end of May, Credit Suisse had repaid its outstanding PLB amounts in full to the Swiss National Bank (SNB.). The next logical step was the termination of the loan agreements between the SNB and Credit Suisse and of the loss protection agreement between the Confederation and the SNB.
The agreement between the SNB and Credit Suisse was terminated by mutual consent. The termination of the liquidity assistance loans with a federal default guarantee up to a maximum of CHF 100 billion means the federal guarantee also ceases. The Confederation did not have to make any payments under the guarantee and therefore did not suffer any loss. Upon termination, the Confederation had earned receipts totalling CHF 160.6 million on the default guarantee for the SNB loans to Credit Suisse.
The termination of the public liquidity backstop (PLB) is final. Credit Suisse (and UBS as legal successor) has thereby voluntarily decided not to avail itself of the liquidity assistance loans with a federal default guarantee. This means the necessary federal guarantee credit for the guarantee ceases to exist. Without a guarantee credit, it is not possible to conclude a new guarantee agreement should this be required.
Somewhat. This draft is intended to simultaneously transfer into ordinary law not only the framework for a PLB instrument as introduced in March 2023 by the Federal Council via ordinance, but also other measures introduced at that time and aimed at supporting the takeover of Credit Suisse by UBS. The termination of the agreement has no impact on the ordinary part, the introduction of the PLB. However, only those emergency law components that still appear necessary are to be transferred into ordinary law.
Although the existing regulations strengthened the capital base and liquidity of systemically important banks, the Federal Council had only sketched out the parameters for a potential state guarantee for liquidity assistance (public liquidity backstop), an instrument that has been tried and tested internationally, and the corresponding legislative project is still in the pipeline. In view of the severe market turmoil Credit Suisse was facing, the Federal Council has now introduced this instrument based on emergency law under Articles 184 and 185 of the Federal Constitution in order to safeguard the stability of the Swiss economy and the global financial system.
Legislation issued by the Federal Council on the basis of Article 184 paragraph 3 and Article 185 paragraph 3 of the Federal Constitution must always apply for only a limited period. Any emergency ordinance would expire after 6 months if no dispatch had been submitted to Parliament in the meantime (Art. 7 of the GAOA). For reasons of legal certainty, specific measures that are taken on the basis of the emergency ordinance will of course continue to apply.
In the case at hand, there are exceptional secrecy considerations, in particular because of the trade secrets and ongoing negotiations. It is important that the authorities receive all relevant information from the systemically important banks. The FoIA would hamper this process, as the affected institutions might be concerned that the authorities would have to grant access to the information and documentation provided. This could result in the institutions providing the relevant information in incomplete form or after a long delay, or not providing it at all.
However, the authorities do inform the public about important findings, parameters and framework conditions. Please refer to, among other things, the Federal Council press conference of 19 March 2023, the explanatory report on the emergency ordinance and the information on the FDF website, which is updated on an ongoing basis.
On 19 March 2023, there were several options available to solve the acute problems of Credit Suisse, including a takeover by another bank, nationalisation and restructuring in accordance with the TBTF regulations. After careful consideration, however, the Federal Council found the takeover of Credit Suisse by UBS to be the best overall solution for financial stability and the Swiss economy.
The alternatives to a takeover by UBS were:
Temporary public ownership: temporary public ownership (TPO) of the entire Credit Suisse Group was not at the forefront during the preparatory work for regulatory and legal reasons, as well as due to risk considerations, and it was not pursued as a priority in view of the real possibility of a private takeover. Had the federal government taken over Credit Suisse, it would have had to assume all of the bank's risks and its management.
Restructuring of the bank as provided for in the TBTF regime, including bail-in to absorb the necessary losses from the subsequent restructuring work: the massive loss of confidence in Credit Suisse was so severe before the weekend of 18 and 19 March that it was highly debatable whether another capital increase and restructuring could have restored the necessary confidence.
Bankruptcy and triggering of the emergency plan: the bankruptcy of the financial group and the activation of the Swiss emergency plan to ensure the continuity of systemically important functions in Switzerland in particular would have been hugely destabilising for the markets in the prevailing circumstances. Moreover, it would have been extremely unclear whether the separated, surviving Swiss bank would have been able to regain market confidence in the long term in this situation.
A spin-off of the Swiss business arm would entail allowing the entire bank to fail and retaining only those bank functions which are systemically important for Switzerland.
This scenario was deemed far too risky by the Federal Council and the supervisory authorities in the current situation where global financial markets are in turmoil.
There are two reasons for this:
First, in the current, extremely fragile environment, it could have triggered an international financial crisis. This would have had massive repercussions for Switzerland as a business location and financial centre.
Second, client confidence in Credit Suisse had unfortunately been eroded to such an extent that implementing the emergency plan would have carried considerable risks for the Swiss business arm as well.
However, important parts of the TBTF regime have also proved to be very effective. It is only because of the stricter capital and liquidity requirements that Credit Suisse was able to survive some of the turbulence at all. But in this case, we reached a point where the loss of confidence could no longer be stopped.
The too-big-to-fail measures (increased capital and liquidity requirements, and improved resolvability) are suitable for lowering the likelihood of state intervention. The stability of the Swiss financial sector as a whole is also attributable to these measures. However, following massive and rapid outflows of funds, confidence in Credit Suisse has been eroded very quickly, despite it having sufficient capital and high liquidity for a prolonged period, and the bank is at risk of bankruptcy. While the possibility of a public liquidity backstop is in the pipeline in Swiss legislation, it is not yet in force. Therefore, it had to be enacted under emergency law in order to safeguard the stability of the Swiss economy and the financial system.
The existing regulations will be continually reviewed and, if necessary, adapted to new developments. Specifically, the introduction of a public liquidity backstop is being prepared. Moreover, even higher liquidity requirements had already been decided for systemically important banks. These came into force on 1 July 2022 and must be met by the end of 2023.
At the end of March 2023, the Federal Council decided to review the takeover of Credit Suisse by UBS and to evaluate the too-big-to-fail framework. In doing so, the Federal Council relies on Article 52 of the Banking Act, which obliges it to report regularly on systemically important banks. The next corresponding report should be available by the beginning of April 2024. In connection with the preparation of the report, the Federal Department of Finance has set up a working group under the leadership of Jean Studer, former Chairman of the Bank Council of the Swiss National Bank. See:
Credit Suisse dividend payments were not allowed for the duration of the state support. The Federal Council also imposed restrictions with regard to remuneration packages, pursuant to Article 10a of the Banking Act.
Yes. FINMA has been provided with a clearer legal basis so that part of Credit Suisse's regulatory capital can be written off (private creditors are to share in the exposures to the tune of CHF 16 bn2). This ensures that private measures are taken in addition to state measures.
2 Correction of 20.03.2023: changed from "around CHF 17 bn" to "CHF 16 bn"
Yes, deposits of up to CHF 100,000 are safe, even if the bank were to go bankrupt. The takeover of Credit Suisse by UBS and the public liquidity backstop will boost confidence in the bank's stability.
The currently outstanding variable remuneration of the top three levels of management at Credit Suisse will either be cancelled (Executive Board), or reduced by 50% (members of management one level below the Executive Board) or by 25% (members of management two levels below the Executive Board). This differentiated approach takes account of the most senior managers' responsibility for the situation at Credit Suisse. Credit Suisse is also obliged to examine the possibility of recovering variable remuneration already paid out and to report to FINMA on the matter. In addition, the variable remuneration due in 2023 will be cancelled or reduced on a pro rata basis until the takeover is completed. The measures affect around 1,000 employees and concern CHF 50-60 million in variable remuneration.
The federal guarantee was not required because UBS got into difficulty; instead, it was provided proactively to enable a solution to be found for Credit Suisse. If UBS can no longer offer a competitive remuneration system, there is a danger of this resulting in a considerable risk for operational stability and ultimately for the bank's entire business, which is something to be avoided.
However, UBS is required to establish a separate organisational unit for winding down the portfolio. Within this organisational unit, there is an obligation to implement incentive-based remuneration schemes for the employees charged with the realisation. The assets are to be managed in such a way that losses are minimised and realisation proceeds are maximised.
Federal receipts and risk exposure with regard to liquidity loans and the loss protection guarantee
Definitive status as of 11 August 2023
Commitment premium of 0.25% p.a. for CHF 100 billion public liquidity backstop (PLB):
Accrued premium (cumulative since 19 March 2023):
CHF 100.7 million
(transfer not until the termination of the loan agreement)
Risk premium of 1.5% p.a. for effectively utilised public liquidity backstop (PLB):
Premium payments made (cumulative since 20 March 2023):
CHF 60.6 million
PLB: In addition to the commitment and risk premiums payable to the Confederation, Credit Suisse pays the SNB interest and a risk premium.
The other liquidity assistance provided by the SNB (without a state guarantee) is not mentioned here.
UBS loss protection agreement: guarantee fee
Status as of 11 August 2023
Initial set-up fee:
CHF 20 mn (end September: second tranche of 20 mn)
Annual maintenance fee of 0.4% applied to 9 billion, i.e. 36 million p.a. (from October 2023):
CHF 0
Annual drawn portion fee of between 0% and 4% applied to 9 billion, contingent on the losses already realised and those still to be expected:
CHF 0
