Liquidity management

UBS defines liquidity as the ability to meet obligations as they come due and to provide funds for increases in assets without incurring unacceptable costs.

Market overview: first half 2008

During first half 2008, the financial and credit market weakness that began with the dislocation of the US residential mortgage market in second half 2007 continued. This led to a sharp reduction in trading volumes in some previously highly liquid markets. In the secured financing markets, certain assets were subject to lower advance rates and were sometimes not accepted. Capital markets and liquidity in risk assets continued to be constrained, while the costs of financing generally rose.

UBS does not expect markets to become more liquid in the short-term. Since the onset of these market disruptions, the firm has maintained a comfortable liquidity position due to its broad and highly diversified funding sources, its large quantity of liquid assets and its robust contingency planning processes. The size of UBS's reserves and the structure of its balance sheet - particularly the size, composition and liquidity of its asset base and the term structure of its funding - are reviewed regularly and adjusted to market conditions.

Throughout second quarter 2008, UBS continued to adjust its asset and liability positions in order to maintain its financial flexibility. UBS maintained its substantial liquidity reserves, which include a large multi-currency portfolio of unencumbered high-quality and short-term assets as well as available and unutilized liquidity facilities at several major central banks. Continuation of selective asset reduction programs has allowed UBS to maintain its liquidity reserves despite difficult market conditions.

Liquidity measures

UBS uses several measures to continuously track its liquidity position and maintain a balanced asset and liability profile over time. These measures include monitoring its contractual and behavioral maturity profiles, projecting its liquidity exposures under various stress scenarios and monitoring its secured funding capacity.

To preserve a well balanced and diversified liability structure, Group Treasury routinely monitors UBS's liquidity and funding status and reports its findings regularly to senior management and the Group Executive Board. This includes an assessment of the firm's "cash capital" position and concentration risks in its main funding portfolios. Cash capital is the difference between UBS's long-term funding and the total of illiquid assets, where "long-term" and "illiquid" both refer to a time horizon of one year.

In response to the market dislocation discussed above, UBS increased both its modeling and monitoring frequency, and the projected severity of the scenarios it uses to monitor and develop effective responses that mitigate potential liquidity exposures in a crisis scenario. The models analyze the impacts of a severe liquidity crisis, in which a firm-specific crisis occurs within a stressed market environment. The underlying assumptions in the analysis encompass the characteristics that have emerged in the present market turmoil, such as continued risk aversion and dislocation in terms of money markets and market liquidity limited to a very narrow range of asset classes. The assumptions incorporated in UBS's current stressed scenario analysis have far exceeded the conditions experienced during the current market crisis.

Funding profile

UBS continues to maintain a well balanced portfolio of liabilities that is broadly diversified by market, product and currency, minimizing its dependency on any single funding source. This, together with its centralized funding management, has enabled UBS to fund its business activities throughout the current prolonged period of market stress. UBS's domestic retail and global wealth management businesses have continued to be valuable and reliable sources of funding. Funding is also provided through numerous short-, medium- and long-term funding programs in Europe, the US and Asia, which provide specialized investments to its institutional and private clients.

At the end of second quarter 2008, UBS's funding profile remained broadly similar to its funding profile both at prior quarter-end and at year-end 2007, in terms of diversification with respect to both currency and product type, as illustrated in the graphs on the right. Approximately 20% of funding continues to be raised on a secured basis and UBS's unsecured funding base remains well diversified. The proportion of UBS's funding from savings and demand deposits increased to 21% from 18% at prior quarter-end, long-term debt remained stable at 18%, as have time deposits at 16%. The relative amount of money market papers dropped slightly, to 10% from 11%, as did short-term inter-bank borrowing, to 9% from 10%, while the proportion of funding from fiduciary deposits rose slightly to 6% from 5% compared with the prior quarter-end.

UBS raised a significant amount of new long-term funds in second quarter 2008 despite the persistent difficult market environment. This included proceeds from approximately CHF 35 billion of long-term debt and structured notes issuance, more than CHF 15 billion of proceeds from the rights offering and the issuance of EUR 1 billion in perpetual preferred securities. Among the notable funding transactions executed in second quarter was a JPY 91.5 billion public offering of senior notes in Japan. This debut transaction in the Samurai market added further diversification to UBS's sources of long-term funding.