Breakingviews - UBS’s $10 bln state guarantee is a useful fantasy
shrinking UBS. If the government were to actually put money directly into the bank, such far-fetched ideas could become plausible.
The incentives therefore favour an agreement that’s designed not to be triggered. One option could be for the state to guarantee only a limited subset of former Credit Suisse assets – just the ones that UBS plans to get rid of, for example, like fixed-income derivatives. The government could also insist on dividend or buyback restrictions if the Swiss bank ever taps the scheme.
Still, even a phantom backstop serves a purpose for UBS, because of the way regulators calculate capital requirements. A lender must fund itself with a buffer of equity corresponding to the size of its assets, adjusted for their riskiness. A loss guarantee provided by the government, even unused, makes the covered assets safer for UBS, meaning regulators should sign off on a lower risk weighting. All else equal, that automatically pushes up UBS’s capital ratio.
The risk, for both sides, is that Credit Suisse’s assets are much worse than they appear, causing large losses. That would put Ermotti in a tricky position: bill the taxpayer, provoking a political backlash, or pass the pain onto shareholders instead.
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