The last-minute rescue of Credit Suisse by its larger rival UBS has prevented the banking crisis from exploding, but it leaves Switzerland exposed to a single massive financial institution with huge uncertainty over the success of the mega merger. The tie-up with UBS was the best chance of restoring stability in the banking sector, and protecting the Swiss economy in the near term. However, Switzerland’s Social Democratic party says the newly created “super-megabank” increases risks for the Swiss economy as it increases concentration risk and market share control.
The problem with having one single large bank in a small economy is that if it faces a bank run, which UBS did during the 2008 crisis, the government’s financial firepower may be insufficient. Taxpayers are 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) with the state also explicitly guaranteeing a 100 billion Swiss franc ($109 billion) loan to UBS, should it need it.
UBS is in a much stronger financial position than during the 2008 crisis, but now it will be required to build up an even bigger financial buffer as a result of the deal. The combined assets of the new entity amount to double the size of Switzerland’s annual economic output. The newly-created “super-megabank” has a roughly 30% market share in Swiss banking and need to either exit or IPO some businesses to mitigate risk.
According to Andrew Kenningham of Capital Economics, the track record of shotgun marriages in the banking sector is mixed. The 1995 purchase of Barings by ING has proved long-lasting. But others, including several during the global financial crisis, soon brought into question the viability of the acquiring bank, while others have proven very difficult to implement. UBS promises to remove 8 billion francs ($8.9 billion) of costs a year by 2027, 6 billion francs ($6.5 billion) from cutting jobs in its efforts to remain rock-solid.