The Value of the Liability Insurance for Credit Suisse and UBS

Using an options-based approach, we compute the value of the state guarantee for the liability side of Credit Suisse and UBS. Insurance premiums for these two systemically important banks are calculated in a dynamic setup from 2004 through 2009 in quarterly steps for time horizons of one and five years. The model captures the characteristics of the current financial crisis and detects the bailout of UBS. Strengthened capital requirements and an increased number of audits reduce the value of the guarantee substantially.