London () — Credit Suisse’s full-speed bailout may have prevented the current banking crisis from breaking out, but it represents a complex deal for Switzerland.
Concerns that Credit Suisse’s fall would lead to a broader banking collapse left Swiss regulators with few good options. An alliance with its biggest rival, UBS, offered the best chance of restoring stability to the banking sector globally and in Switzerland, and protecting the country’s economy in the short term.
But it leaves Switzerland exposed to a single huge financial institution, even as there is still great uncertainty about the success of the mega-merger.
“One of the most established facts in academic research is that bank mergers almost never work,” said Arturo Bris, a finance professor at the Swiss business school IMD.
There are also concerns that the deal will cause massive job losses in Switzerland and weaken competition in the country’s vital financial sector, which overall employs more than 5% of the national workforce, or nearly 212,000 people.
Meanwhile, taxpayers are now subject to potential future losses of up to 9 billion Swiss francs ($9.8 billion) in UBS from certain Credit Suisse assets, provided those losses exceed 5 billion francs ($5.4 billion). ). The state also explicitly guaranteed a lifeline of 100 billion Swiss francs ($109 billion) to UBS, should it need it, although it would be reimbursable.
An aerial view of the headquarters of Credit Suisse (center) and UBS (left) on Paradeplatz in Zurich, Switzerland, on Sunday, March 19, 2023. (Credit: Michael Buholzer/Keystone/AP)
Switzerland’s social democratic party has already called for a investigation about what went wrong at Credit Suisse, arguing that the newly created “supermegabank” increases the risks for the Swiss economy.
The demise of one of Switzerland’s oldest institutions surprised many of its citizens. Credit Suisse is “part of the Swiss identity,” said Hans Gersbach, professor of macroeconomics at ETH Zurich. The bank “has been instrumental in the development of modern Switzerland.”
Its collapse has also tarnished Switzerland’s reputation as a safe and stable global financial center, particularly after the government stripped shareholders of voting rights to seal the deal.
Swiss authorities also eliminated some bondholders before shareholders, upending the traditional hierarchy of losses in a bank collapse and dealing another blow to the country’s reputation among investors.
“The repercussions for Switzerland are terrible,” said IMD’s Bris. “For starters, Switzerland’s reputation was damaged forever.”
That will benefit other wealth management centers, including Singapore, he told . Singaporeans are “celebrating…because there is going to be a huge inflow of funds into other wealth management jurisdictions.”
Too big to fail?
At approximately US$1.7 billion, the combined assets of the new entity are twice the size of Switzerland’s annual economic output. By deposits and loans to Swiss clients, UBS will now be bigger than the next two local banks combined.
With a market share of about 30% in Swiss banking, “we see too much concentration risk and market share control,” JPMorgan analysts wrote in a note last week before the deal was finalized. They suggested that the combined entity would have to exit or make an initial public offering of some businesses.
The problem with having just one big bank in a small economy is that if it faces a run on the bank or needs a bailout — which UBS did during the 2008 crisis — the government’s financial power may be insufficient.
At 333 billion francs ($363 billion), local deposits in the new entity are equivalent to 45% of GDP, a huge amount even for a country with healthy public finances and low debt levels.
On the other hand, UBS is in a much stronger financial position than during the 2008 crisis and will need to build up an even bigger financial cushion as a result of the deal. Swiss financial regulator FINMA said it “will closely monitor the transaction and its compliance with all the requirements of the supervisory law.”
UBS Chairman Colm Kelleher underscored the health of UBS’s balance sheet on Sunday at a news conference on the deal. “Having been financial director [en Morgan Stanley] During the last global financial crisis, I am well aware of the importance of a strong balance sheet. UBS will continue to be rock solid,” he said.
Kelleher added that UBS would trim the investment bank from Credit Suisse “and align it with our conservative risk culture.”
Andrew Kenningham, chief European economist at Capital Economics, said that “the question of market concentration in Switzerland is something that will be addressed in the future.” “The 30th% [de participación de mercado] It’s higher than I would ideally want, but not so high that it’s a major problem.”
The deal “surgically removed the most worrisome part of the banking system [de Suiza]leaving him stronger, Kenningham added.
Jobs and competition
However, the deal will have an adverse effect on jobs, likely adding to the 9,000 cuts Credit Suisse has already announced as part of an earlier recovery plan.
For Switzerland, the threat is acute. The two banks collectively employ more than 37,000 people in the country, around 18% of the financial sector workforce, and they are likely to overlap.
“The Credit Suisse branch in the city where I live is right across from the UBS branch, which means that one of the two will certainly close,” IMD’s Bris wrote in a note on Monday.
In a call with analysts late Sunday, UBS CEO Ralph Hamers said the bank would aim to eliminate 8 billion francs ($8.9 billion) of costs a year by 2027, of which 6 billion francs (US$6.5 billion) would come from staff reductions.
“We are clearly aware of the Swiss social and economic factors. We will be considerate employers, but we must do it rationally,” Kelleher told reporters.
The Credit Suisse headquarters in Zurich. (Credit: Fabrice Coffrini/AFP/Getty Images)
The hastily made agreement not only fails to protect jobs in Switzerland, but also contains no special provisions on competition issues.
UBS now has “near monopoly power”, which could increase the cost of banking services in the country, according to Bris.
Although Switzerland has dozens of smaller savings and regional banks, including 24 cantonal banks, UBS is now an even more dominant player. “Everything they do…will influence the market,” said ETH’s Gersbach.
Credit Suisse’s Swiss banking arm, arguably its crown jewel, could have been subject to a future sale as part of the terms of the deal, he added.
However, a spin-off from the national bank now looks unlikely, after UBS made it clear it intended to keep it. “The Swiss bank Credit Suisse is a good asset that we are very determined to keep,” Kelleher said Sunday.
integration is hard
At $3.25 billion, UBS obtained Credit Suisse for 60% less than the bank was worth when markets closed two days earlier. Whether that ultimately turns out to be a bargain remains to be seen. Large mergers are notoriously fraught with risk and often fail to deliver promised returns to shareholders.
UBS argues that by expanding its global wealth and asset management franchise, the deal will deliver long-term shareholder value. “UBS’ strength and our familiarity with Credit Suisse’s business uniquely position us to execute this integration efficiently and effectively,” said Kelleher. UBS expects the deal to increase its profits by 2027.
The transaction is expected to close in the coming months, but full integration of the two institutions will take three to five years, according to Phillip Straley, president of data analytics firm FNA. “There is a great deal of integration risk,” he said.
Moody’s affirmed its credit ratings on UBS on Tuesday but changed the outlook on some of its debt to negative from stable, judging that the “complexity, scope and duration of the integration” pose risks for the bank.
He pointed to challenges in retaining key Credit Suisse personnel, minimizing the loss of overlapping clients in Switzerland and unifying the cultures of “two somewhat different organizations.”
According to Kenningham of Capital Economics, the “record of forced marriages in the banking sector is mixed.”
“Some, like ING’s purchase of Barings in 1995, have proved enduring. But others, including several during the global financial crisis, soon called into question the viability of the acquiring bank, while others have proven very difficult to implement.
