In the wake of the financial crisis of 2008, governments across the world decided that it was time to end the bail-out of too-big-to-fail financial institutions. This article considers the strategies deployed in Switzerland to solve the problem: increased capital requirements, including leverage ratios and liquidity requirements, funding of the resolution in the event of a gone-concern, resolution measures, through bail-in powers and the authority to transfer assets, liabilities and live agreements to another financial institution, as well as the resolution stay, and finally, organizational measures, which were not imposed through rules, but rather implemented through a carrot-and-stick approach using positive incentives and regulatory sanctions, to nudge financial institutions to improve their resolvability. In conclusion, we take stock by looking back at what was achieved, but also consider the risks that come with the increased powers granted to regulators and supervisory authorities following the crisis.
I. Looking back: from bail-outs to bail-ins
1. Bailing out UBS AG
Ten years ago, on 16 October 2008, the Swiss Government and the Swiss National Bank (SNB) bailed out UBS AG. The bank had already gone through two rounds of capital increases. However, in the aftermath of the failure of Lehman Brothers, most global financial institutions incurred large losses and their capital melted. UBS AG needed to be recapitalized otherwise it would have probably faced a bank run.
The transaction was structured in two steps: first, the Swiss government subscribed a CHF 6 billion mandatory convertible subordinated note with a coupon of 12.5% per annum, thus recapitalising UBS AG.1 Then, the SNB set up a "bad bank",2 SNB Stab Fund limited partnership for collective investments (SNB Stab Fund), to acquire up to USD 60 billion of illiquid assets from UBS AG. UBS AG financed 10% of the consideration paid by SNB Stab Fund to purchase the illiquid assets, whereas the remaining 90% were financed by the SNB, which extended a secured credit facility to SNB Stab Fund.3 Keeping to central bank regulations, the purpose of this second step was not to recapitalise a financial institution, but only to provide liquidity in extremely difficult circumstances as a lender of last resort.4 A key element in the process was therefore a prudent valuation of the illiquid assets.5 As an additional loss protection, the SNB received a warrant to purchase hundred million UBS shares at the nominal value of CHF 0.10 if the loan was not repaid in full.6 Eventually assets worth USD 39 billion based on a valuation the end of September 2008 were transferred to SNB Stab Fund in three tranches that were carried out between December 2008 and April 2009.7
In August 2009, the Swiss government exercised its conversion rights and sold its shares in UBS for CHF 5.48 billion. Taking into account interest payments of approximately CHF 1.8 billion, the Swiss government could close this chapter after earning a net amount of CHF 1.2 billion.8 The realisation of the portfolio illiquid assets of the SNB Stab Fund took somewhat more time. Eventually, on 15 August 2013, SNB Stab Fund was able to repay its loan from the SNB and, in November 2013, UBS AG took the residual assets back on its consolidated balance sheet by buying out the SNB from the SNB Stab Fund for USD 3.67 billion. Overall, the SNB earned USD 1.6 billion in interest.9
At the end of the day, this transaction was a success: UBS was able to weather the financial crisis and the Swiss financial system was stabilized.10 The Swiss government and the SNB made a sizeable profit, at least in absolute terms.11 The stakes, however, were high: the overall exposure of the SNB amounted to approximately 10% of the Swiss GDP. The mandatory convertible note alone was worth 1% of the Swiss GDP.12
1. Verordnung über die Rekapitalisierung der UBS AG, 15 October 2008, AS 2008 4741; Botschaft zu einem Massnahmenpaket zur Stärkung des schweizerischen Finanzsystems, 5 November 2008 ("Botschaft zum Massnahmenpaket 2008"), BBl 2008 8961.
2. Botschaft zum Massnahmenpaket 2008, BBl 2008 8962. Formally, SNB StabFund was not a bank, but a collective investment scheme. Initially, the SNB planned to establish an offshore special purpose vehicle for this purpose. Eventually, it settled down for a Swiss law collective investment scheme, a limited partnership for collective investments. See Swiss National Bank, Annual Report 2008, 79; SNB, press release of 26 November 2008, (available at https://www.snb.ch/en/mmr/reference/pre_20081126_2/source/pre_20081126_2.en.pdf ).
3. Swiss National Bank, Annual Report 2008, 77–78; Press release of the Federal Department of Finance of 16 October 2008 (available at ); SNB, Press release of 16 October 2008 (available at https://www.efd.admin.ch/efd/en/home/dokumentation/nsb-news_list.msg-id-22019.html); Thomas Jordan, StabFund – Preparation and Set-up phases, main features and challenges of operation, 8 November 2013, 11 (available at https://www.snb.ch/en/mmr/reference/pre_20081016_1/source/pre_20081016_1.en.pdf). See also Christine Kaufmann, SNB und FINMA in neuen Rollen, SZW 2009, 418, 422; Diego Haunreiter, Die Krisenabwehr im Bankgesetz, Berne 2011, N 1218–1220.
4. See Article 5 (2)(e) and 9 (1)(f) of the Federal Act on the Swiss National Bank of 3 October 2003, (National Bank Act, NBA, SR 951.11); Swiss National Bank, Annual Report 2008, 80; Swiss National Bank, Annual Report 2013, 90.
5. See Swiss National Bank, Annual Report 2008, 83.
6. See ibid, 89.
7. See Swiss National Bank, Annual Report 2009, 85; Swiss National Bank, Annual Report 2008, 79; Jordan (fn. 3), 18.
8. Federal Department of Finance, Press Release of 19 August 2009 (available at https://www.efd.admin.ch/efd/de/home/dokumentation/nsb-news_list.msg-id-28519.html ); UBS, Press release of 19 August 2009, (available at https://www.ubs.com/global/en/about_ubs/media/switzerland/releases/news-display-media-switzerland-ndp/en-20090819-ankuendigung_der_schweizerischen_eidgenossenschaft.html ).
9.Swiss National Bank, Annual Report 2013, 92–94; SNB Press Release of 8 November 2013 (available at https://www.snb.ch/en/mmr/reference/pre_20131108/source/pre_20131108.en.pdf ); Thomas Jordan/Marcel Zimmermann, StabFund – winding up the SNB StabFund transaction, 8 November 2013, 3.
10 SNB, Press Release of 8 November 2013; Jordan (fn. 3), 14.
11 A more thorough analysis would be required to determine whether the risk-return-ratio was appropriate. This would, however, require access to more data.
12 SNB, Financial Stability Report 2018, 22.
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