The last-minute rescue of Credit Suisse has prevented the current banking crisis from exploding, but it’s a raw deal for Switzerland.
A tie-up with Credit Suisse’s larger rival, UBS, has left Switzerland exposed to a single massive financial institution, with huge uncertainty over how successful the mega-merger will prove to be.
Below we’ll discusses the possible consequences of the deal, including job losses, taxpayer liabilities, and damage to Switzerland’s reputation.
Swiss Regulators and Uncertainty
The collapse of Credit Suisse would have caused a banking meltdown, leaving Swiss regulators with few options.
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. However, there is still huge uncertainty over how successful the mega merger will prove to be.
One of the most established facts in academic research is that bank mergers hardly ever work, says Arturo Bris, a professor of finance at Swiss business school IMD.
Job Losses and Weakened Competition
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 212,000 people.
The combined assets of the new entity amount to double the size of Switzerland’s annual economic output. By deposits and loans to Swiss customers, UBS will now be bigger than the next two local banks combined.
With a roughly 30% market share in Swiss banking, we see too much concentration risk and market share control, according to JPMorgan analysts.
Taxpayer Liabilities and Reputation Damage
Taxpayers are now on the hook for up to 9 billion Swiss francs ($9.8 billion) of future potential losses at UBS arising from certain Credit Suisse assets, provided 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.
The demise of one of Switzerland’s oldest institutions has come as a shock to many of its citizens, and it has also tainted Switzerland’s reputation as a safe and stable global financial center.
Market Concentration and Acute Threat to Jobs
At 333 billion francs ($363 billion), local deposits in the new entity equal 45% of GDP, an enormous amount even for a country with healthy public finances and low levels of debt. The problem with having one single large bank in a small economy is that if it faces a bank run or needs a bailout, the government’s financial firepower may be insufficient.
UBS chairman Colm Kelleher underscored the health of UBS’s balance sheet Sunday at a press conference on the deal. “Having been chief financial officer [at Morgan Stanley] during the last global financial crisis, I’m well aware of the importance of a solid balance sheet. UBS will remain rock-solid,” he said.
Kelleher added that UBS would trim Credit Suisse’s investment bank “and align it with our conservative risk culture.”
Andrew Kenningham, chief Europe economist at Capital Economics, said “the question of market concentration in Switzerland is something to address in future.” “30% [market share] is higher than you might ideally want but not so high that it’s a major problem.”
The deal has “surgically removed the most worrying part of [Switzerland’s] banking system,” leaving it stronger, Kenningham added.
The deal will have an adverse effect on jobs, likely adding to the 9,000 cuts that Credit Suisse already announced as part of an earlier turnaround plan. The two banks 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.
“We are clearly cognizant of Swiss societal and economic factors. We will be considerate employers, but we need to do this in a rational way,” Kelleher told reporters.
The Bottom Line
The merger between Credit Suisse and UBS may have prevented a banking meltdown, but it comes with its own set of risks and consequences.
The deal has left Switzerland exposed to a single massive financial institution, even as there is still huge uncertainty over how successful the merger will be.
It has damaged Switzerland’s reputation as a safe and stable global financial center, and there are concerns about job losses and weakened competition in the country’s vital financial sector.
However, the deal has surgically removed the most worrying part of Switzerland’s banking system, leaving it stronger.