ZURICH, SWITZERLAND – UBS, Switzerland’s largest bank, was bailed out by the federal government in 2008, a turning point for the banking industry, but five years later the Swiss National Bank (SNB) says UBS is paying $3.762 billion to buy back what is called the StabFund.
The StabFund was created in October 2008 and took over UBS illiquid assets of CHF38.7 billion. The bank showed a CHF20 billion loss for 2008, the largest-ever Swiss corporate loss and one of the largest banking losses during the sub-prime mortgage crisis in the US.
The creation of the StabFund move sparked heated political debate and eventually led to the legislation to cover banks considered too big to fail and on a global level to the Third Basel Accord, known as Basel III, a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk. The members of the Basel Committee on Banking Supervision, an international group based in Basel, agreed on the accord in 2011, and it is scheduled to be implemented by 2018.
“The Swiss Confederation simultaneously strengthened UBS’s capital base by subscribing to mandatory convertible notes in the amount of CHF6 billion. The assets and contingent liabilities taken over by the StabFund were financed by an SNB loan amounting to $25.8 billion. At the same time, UBS provided $3.9 billion. This equity was intended to cover the first 10 percent of any loss incurred by the StabFund, which was fully owned by the SNB.
The difference between the funds paid into the StabFund and the total sum of transferred assets was made up of contingent liabilities which, at that point, did not require any financing. The announcement of the transaction in October 2008 and the transfer of the troubled assets finalized in April 2009 stabilized UBS’s business situation, thereby achieving the objective of the package of measures. The next task was to manage and wind down the portfolio consisting of securities, loans and derivatives.
This was done by the SNB and UBS jointly. The Board of Directors of the StabFund consisted of three members from the SNB and two from UBS; the chairman was always an SNB representative. The SNB was in charge of management and established a seven-person team for this purpose. At UBS, a group of about 70 staff implemented the specified guidelines for the management and sale of the assets. Since the success of the StabFund was in the interests of both parties, this cooperation worked well.
Once the assets had been transferred in three tranches, from October 2008 to April 2009, the task of reducing the exposure began. The StabFund based its work on the intrinsic values of the assets, which were calculated from the future cash flows to be expected. When the market situation was good, assets were sold rapidly, while restraint was exercised when market setbacks were experienced, such as in 2011. The cash flows which led to a gradual repayment of the SNB loan to the StabFund were made up in essence of principal repayments ($13.4b), interest payments ($3.9b) and sales ($15.8b). In mid-August 2013, the final repayment was made.
Once the loan was repaid, the option transaction was triggered, which made it possible for UBS to purchase the StabFund. After the remaining positions in the portfolio had been sold over the summer months, the StabFund was left with mostly cash equivalents at the end of September. At this time, the balance sheet showed equity of $523 billion. US securities, in particular, recorded cash flows over the entire life of the portfolio in excess of the purchase price paid to UBS at the outset. By contrast, the situation for European assets was less favourable, since the euro debt crisis from 2010 had a negative impact on t he value of these positions.
For the SNB, the transfer of the StabFund to UBS represents the successful conclusion of a challenging undertaking and one which, for the SNB, was out of the normal run of business.
From a financial point of view, it has gained interest income of a total of $1.6 billion over the term of the loan in addition to its $762 billion share in the equity. However, attaining a profit was never an objective in its own right. The prime reason for the establishment of the StabFund was its contribution to strengthening the Swiss financial system.”