How UBS-Credit Suisse Merger Has Created A Bank Twice As Big As Switzerland's Economy

The last-minute rescue of Credit Suisse by its bigger rival UBS may have prevented the current banking crisis from exploding, but it seems to be a raw deal for Switzerland.

Worries Despite Credit Suisse Merger

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Worries that Credit Suisse¡¯s downfall would spark a broader banking meltdown have left Swiss regulators with few good options. A tie-up with its larger rival UBS offered the best chance of restoring stability in the banking sector globally and in Switzerland and protecting the Swiss economy in the near term.

But at the same time, it also leaves Switzerland exposed to a single massive financial institution, even as there is still huge uncertainty over how successful the mega merger will prove to be, as per a CNN report.

There are concerns that the deal will lead to huge 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 2.12 lakh people.

Meanwhile, taxpayers are now liable for up to 9 billion Swiss francs ($9.8 billion) in future potential losses at UBS arising from certain Credit Suisse assets if those losses exceed 5 billion francs ($5.4 billion). The state has also explicitly guaranteed a 100 billion Swiss franc ($109 billion) lifeline to UBS, should it need it, although that would be repayable.

Switzerland¡¯s Social Democratic party has already called for an investigation into what went wrong at Credit Suisse, arguing that the newly created "super-megabank" increases risks for the Swiss economy.

Its collapse has also tainted Switzerland¡¯s reputation as a safe and stable global financial center, particularly after the government effectively stripped shareholders of their voting rights to get the deal done. The Swiss authorities also wiped out some bondholders ahead of shareholders, upending the traditional hierarchy of losses in a bank failure and dealing another blow to the country¡¯s reputation among investors.

Also Read: Credit Suisse & Citi Group Halt Loans To Adani Group Companies

"Terrible Repercussions For Switzerland"

¡°The repercussions for Switzerland are terrible,¡± said Bris of IMD. ¡°For a start, the reputation of Switzerland has been damaged forever.¡±

That will benefit other wealth management centers, including Singapore, he told CNN. Singaporeans are ¡°celebrating¡­ because there is going to be a huge inflow of funds into other wealth management jurisdictions.¡±

Merger Too Big To Fail?

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At roughly $1.7 trillion, the combined assets of the new entity amount to double the size of Switzerland¡¯s annual economic output. As a result of deposits and loans to Swiss customers, UBS will now be bigger than the next two local banks combined, as per the report.

With a roughly 30% market share 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 done. They suggested that the combined entity would need to exit or IPO some businesses.

The problem with having one large bank in a small economy is that if it faces a bank run or needs a bailout, as UBS did during the 2008 crisis, the government¡¯s financial firepower may be insufficient.

At 333 billion francs ($363 billion), local deposits in the new entity equal 45% of GDP ¡ª an enormous amount even for a country with healthy public finances and low levels of debt. In 2021, GDP in Switzerland will amount to around 799.8 billion U.S. dollars, as per Statista.

On the other hand, UBS is in a much stronger financial position than it was during the 2008 crisis, and it will be required to build up an even bigger financial buffer as a result of the deal. The Swiss financial regulator, FINMA, has said it will "very closely monitor the transaction and compliance with all requirements under supervisory law."

Job Losses & Competition

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The merger deal will have an adverse affect on jobs, though, likely adding to the 9,000 layoffs that Credit Suisse already announced as part of an earlier turnaround plan.

For Switzerland, the threat is acute. The two banks (UBS and Credit Suisse) collectively employ more than 37,000 people in the country, about 18% of the financial sector¡¯s workforce, and there is bound to be overlap.

¡°The Credit Suisse branch in the city where I live is right in front of UBS¡¯s, meaning one of the two will certainly close,¡± Bris of IMD wrote in a note Monday.

After the merger, UBS now has ¡°quasi-monopoly power,¡± which could increase the cost of banking services in the country, according to Bris.

A Difficult Merger Ahead?

At $3.25 billion, UBS got Credit Suisse for 60% less than the bank was worth when markets closed two days prior. Whether that ultimately turns out to be a steal remains to be seen. As per the report, large mergers are notoriously fraught with risk and often don¡¯t deliver the promised returns to shareholders.

UBS argues that by expanding its global wealth and asset management franchise, the deal will drive long-term shareholder value. "UBS¡¯s strength and our familiarity with Credit Suisse¡¯s business puts us in a unique position to execute this integration efficiently and effectively," Kelleher said. UBS expects the deal to increase its profit by 2027.

The transaction is expected to close in the coming months, but fully integrating the two institutions will take three to five years, according to Phillip Straley, the president of data analytics company FNA. "There¡¯s a huge amount of integration risk," he said.

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