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: fourth quarter 2008

The financial and credit market crisis continued to gain in intensity throughout fourth quarter 2008, spreading to the non-financial sector and unfolding into a broader economic crisis pointing towards a global recession. After the failure of one of the major US investment banks in mid-September, the tenor of the interbank lending market was dramatically reduced at the end of September and into October. Access to other term funding was also severely constrained, while credit spreads surged, and companies' financing costs reached new heights. Many governments around the world took intensified actions to stabilize their financial systems and support their economies. These included implementing new policies to permit direct government investment in banks, loan and bank debt guarantees and provision of a large volume of additional liquidity to their financial systems via extraordinary financing facilities. Certain major banks became majority-owned by their governments, while several major countries announced that they would insure all domestic bank deposits and substantially increase the insurance protection for their bank debt, pressuring the deposits and debts of banks covered by weaker protection schemes. In the fourth quarter, the Swiss government announced a number of steps to support its banking system, including a strengthening of the country's bank deposit insurance scheme and a willingness to guarantee interbank liabilities if and when deemed necessary. Throughout most of fourth quarter 2008, public bond market issuances were largely limited to banks whose debt was government-guaranteed.

Liquidity

UBS continuously tracks its liquidity position and asset and liability profile. 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 the early stages of the current market crisis, 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. Despite the severity of the current market crisis, the assumptions incorporated into UBS's current stressed scenario analysis exceed the conditions that have thus far been experienced.

Since the onset of the financial crisis, UBS has 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 extended 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 and funding position by reducing overall funding requirements.

While UBS, like many other major financial institutions, has experienced decreased access to wholesale term funding and a drop in client deposits during the current crisis, this has been counterbalanced by UBS's continued deliberate balance sheet reductions - mostly in the Investment Bank - which have reduced UBS's overall funding needs and helped generate liquidity through asset reductions.

Funding profile

UBS continues to maintain 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 its 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.

The overall composition of UBS's funding sources, as illustrated in the graphs on the right side, has remained stable. In terms of currencies, the share of US dollar and Euro has increased slightly, to 48% and 22%, respectively, compared with third quarter 2008. The proportion of funding raised on a secured basis, primarily through repurchase agreements (and to a lesser extent through cash collateral received for securities lent), dropped to 11% from 19% during the fourth quarter primarily due to continued asset reductions. UBS's unsecured funding remains well diversified. At the end of the fourth quarter, the proportion of UBS's funding from savings and demand deposits was at 24%, up from 21% at the end of the third quarter. Long-term debt (including financial liabilities designated at fair value) accounted for 19% of its funding sources, similar to the third quarter (18%), while the proportion of money market paper increased to 11%. Compared with the prior quarter-end, the proportion of funding from time deposits remained constant, at 17%, as did the relative share of short-term interbank borrowing, at 12%, and of fiduciary deposits, at 6%. UBS raised new long-term funds (excluding MCNs) in fourth quarter 2008 through the issuance of approximately CHF 9.1 billion of long-term debt and structured notes.

The programs that various major central banks had previously introduced and subsequently expanded to provide funding to depository institutions and primary dealers were maintained throughout the fourth quarter. It is expected that most of these programs will remain open at least through first quarter 2009.

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