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 liquidity overview: third quarter 2008

As described in the "Risk management and control" section of this report, the financial and credit market weakness seen in prior quarters broadened and intensified in third quarter 2008.

Rising credit concerns and reduced market liquidity fuelled a self-perpetuating cycle of deteriorating asset market values and deleveraging. This cycle created a fertile environment for further increases in credit risk and a further flight to quality. Inter-bank lending markets were brought to a virtual standstill as banks continued to hoard cash in an attempt to preserve liquidity. The mounting market stress resulted in failure, or forced restructuring, of several major financial institutions. It also triggered an unprecedented, concerted and coordinated effort by global governments and central banks to contain the growing crisis.

Under these conditions, new long-term funding in global markets became increasingly scarce and costly during third quarter, and then became largely unavailable following the collapse of one of the major US investment banks in mid-September. The shorter-term wholesale money markets were similarly affected and by the end of the quarter, new unsecured funding was mostly limited to tenors within one month and secured funding was available only for very high-quality collateral.

Liquidity

UBS continuously tracks its liquidity position and asset and liability profile over time. This involves monitoring its contractual and behavioral maturity profiles, projecting and modeling its liquidity exposures under various stress scenarios and monitoring its secured funding capacity. The results are then factored into the overall contingency plans of UBS.

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 assess and develop effective responses that mitigate potential liquidity exposures in a crisis scenario. 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 being limited to a very narrow range of asset classes. The assumptions incorporated in UBS's current stressed scenario analysis exceed the conditions experienced in the current market crisis.

Since the onset of the financial crisis, UBS has proactively undertaken a number of measures to safeguard its liquidity position. Combined with the broad diversity of its funding sources, its contingency planning processes and its global scope, these additional measures have proven extremely helpful in enabling UBS to maintain a balanced asset / liability profile, in spite of this period of unprecedented market dislocation. In particular, UBS was able to benefit from its substantial multi-currency portfolio of unencumbered high-quality short-term assets. The transaction with the SNB, which was announced in October, further bolsters UBS's liquidity position. Further information on the SNB transaction refer to the "Transaction with the Swiss National Bank" sidebar.

Funding profile

UBS maintains a balanced portfolio of liabilities that is broadly diversified by market, product and currency. The vast product offerings and global scope of the firm's business activities are the primary reasons for funding stability. Funding is provided through numerous short-, medium-, and long-term funding programs in Europe, the US and Asia, which provide specialized investments to institutional and private clients. UBS's domestic retail and global wealth management businesses are a valuable source of funding.

At the end of third quarter 2008, UBS's funding profile was broadly similar to its funding profile 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 to the right. Approximately 19% of funding continues to be raised on a secured basis and UBS's unsecured funding remains well diversified. The proportion of UBS's funding from savings and demand deposits remained stable at 21%, as did long-term debt at 18%. The proportion of funding from time deposits increased to 17% from 16%, along with short-term inter-bank borrowing, which increased to 11% from 9%. The relative amount of money market papers dropped slightly, to 9% from 10%, as did the proportion of funding from fiduciary deposits, to 5% from 6%, compared with the prior quarter-end.

UBS raised new long-term funds in third quarter 2008 through the issuance of approximately CHF 19.7 billion of long-term debt and structured notes.

Throughout the quarter, the Federal Reserve, the European Central Bank, and other major central banks expanded existing programs designed to provide funding to depository institutions and primary dealers. It is expected that these programs will remain open into 2009.

Early in fourth quarter 2008 unprecedented additional public sector initiatives were introduced, in an effort to stabilize global markets and support the financial sector. These included restructurings, recapitalizations, and broad-based credit and liquidity support facilities.

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