Financial crisis
Switzerland unveils bank bail-out plan• UBS hit by 'massive' outflows of clients' money
• Analysts said today's moves made the Swiss banks the best capitalised in the world
The Swiss authorities today moved belatedly to shore up their two biggest banks, taking a near-10% stake in UBS and forcing it and Credit Suisse to increase their capital base.
The government and central bank denied UBS had stood on the brink of catastrophe but Europe's biggest casualty of the sub-prime crisis admitted it had seen a "massive" withdrawal of funds from its wealthy customers and had been drawing on its cash reserves.
UBS, which had written down some $44bn (£25bn) of toxic assets and raised $27bn in fresh capital, saw almost $75bn of assets in wealth and asset management withdrawn in the third quarter.
The process accelerated last month after the US government allowed Lehman Brothers to go bust and investors, worried about the Swiss bank's damaged reputation, panicked.
The surprise Swiss move is the latest by the authorities in the west to bail out their banking sectors in the face of the unprecedented credit crunch but UBS insisted it was a "normal commercial operation " and it was now "clean".
In a deal coordinated by ministers, the Swiss National Bank and federal banking commission, the government effectively pumped $60bn into UBS, taking virtually the last $50bn of its toxic assets into a special purpose vehicle off its books and owned by the SNB.
The government is temporarily taking a 9.3% stake in UBS with a Sfr6bn (£3bn) capital injection. Credit Suisse, the country's second-biggest bank, turned down the offer of state aid but has raised Sfr10bn from sovereign wealth fund Qatar Investment Authority and a group of private investors, including Israeli firm Koor Industries.
These moves will drive up the capital ratios of Switzerland's two biggest banks, with CS at 13.7% and UBS, whose ratio stood at 10.8% at the end of September, climbing higher towards tough new rules due from 2013.
At the core of the tripartite Swiss operation is the decision to take on $49bn of toxic UBS assets — $31bn in the US and $18bn of non-US debt — into the new entity. This will be funded by $6bn of UBS equity acquired via the government and $54bn from the SNB.
The aim is gradually to sell off these illiquid assets, with the central bank receiving the first $1bn of any profits, and it and UBS sharing the rest on a 50-50 basis.
UBS insiders said: "This is now it. We have got rid of these toxic assets but there's an upside and, if they perform well, we can repay the equity. It draws a line, de-risks the bank and puts us ahead of the game as regards other banks."
Marcel Rohner, chief executive, said on a conference call that the moves would enable UBS to "bring itself back on track to a more normal operating mode."
John Cryan, chief financial officer, said the bank would be "significantly" profitable in 2009, enabling dividend payouts to resume in 2010. The bank confirmed previous guidance by reporting a "modest" Sfr296m profit in the third quarter.
Brady Dougan, CS chief executive, reported a third-quarter net loss of around Sfr1.3bn ahead of next week's official figures. CS said its investment bank lost about Sfr3.2bn in the quarter, writing down a further Sfr2.4bn in leveraged finance and structured products.
Analysts said today's moves made the Swiss banks the best capitalised in the world and restored stability to the system. Shares in the two banks, which initially fell as much as 10%, recovered gradually throughout the day.
