(Adds detail)
By John Revill
ZURICH, March 20 (Reuters) - Credit Suisse and UBS could
benefit from more than 260 billion Swiss francs ($280 billion)
in state and central bank support, a third of the country's
gross domestic product, as part of their merger to buffer
Switzerland against global financial turmoil, documents
outlining the deal show.
Swiss authorities announced on Sunday that UBS had
agreed to buy rival Swiss bank Credit Suisse in a
shotgun merger aimed at avoiding more market-shaking turmoil in
global banking.
UBS said it will pay $3.2 billion for the 167-year-old
flagship while the government said UBS would also take on the
first $5.4 billion in losses from unwinding derivatives and
other risky assets.
The deal, however, involves a large amount of public
support, with three tranches of liquidity and loans, as well as
a pledge from the Swiss government to absorb up to 9 billion
francs in potential losses from the takeover.
The total of 259 billion francs of support is equivalent to
a third of Switzerland's entire economic output, which stood at
771 billion francs last year.
"The government's going to have to say to voters why they
are putting citizens' money, taxpayer money at risk to bail out
a bank that was predominantly servicing the ultra wealthy, doing
some pretty extraordinary things with its investment bank and
paying people crazy amounts of money relative to what the man in
the street gets paid," one former global bank CEO, who did not
wish to be identified, told Reuters.
In a memo seen by Reuters that was sent to staff on Sunday
after the deal announcement, Credit Suisse reassured staff that
their bonuses would be paid in full.
Public support for the bank comes in three ways.
Credit Suisse had already been drawing on the Swiss National
Bank’s (SNB) emergency liquidity assistance scheme.
Credit Suisse said last Wednesday it would take 50 billion
francs from the scheme, which provides funding secured against
collateral such as mortgages and securities. As long as the bank
has more collateral, it can draw down further such funding.
Central bank data on Monday indicated that Credit Suisse was
likely already accessing the fund.
On top of this, the Swiss National Bank offered the combined
bank an emergency liquidity loan of up to 100 billion Swiss
francs. That loan is protected in the event of a default.
The third tranche of support allows Credit Suisse to draw on
a further 100 billion francs of funding via a public liquidity
backstop, which is explicitly guaranteed by the Swiss
government.
The SNB declined to comment about whether Credit Suisse or
UBS had made use of the money on offer.
Credit Suisse has been the biggest name ensnared in global
market turmoil unleashed by the recent collapse of U.S. lenders
Silicon Valley Bank and Signature Bank.
UBS and Credit Suisse were both in a group of the 30
global systemically important banks watched closely by
regulators. A failure by Credit Suisse failure would ripple
throughout the entire financial system, the Swiss government
said late on Sunday.
"The bankruptcy of Credit Suisse would have had a huge
collateral damage - on the Swiss financial market also, risk of
contagion for UBS and other banks, and also internationally,"
Swiss Finance Minister Karin Keller-Sutter told a press
conference.
($1 = 0.9278 Swiss francs)
(Reporting by John Revill; Additional reporting by Sinead
Cruise in London; editing by John O'Donnell and Susan Fenton)
Messaging: john.revill.thomsonreuters.com@reuters.net))
