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8:57 am ET, March 24, 2023

UBS-Credit Suisse is going to be huge and not risk free

By Hanna Ziady of CNN

The headquarters of UBS (left) and Credit Suisse (middle) are just a few meters apart in Zurich, Switzerland.

(Michael Buholzer/Keystone/AP)

Although the last-minute rescue of Credit Suisse on Sunday prevented the banking crisis from breaking out, it is a raw deal for Switzerland and is not free of risks.

The merger with its larger competitor UBS offered the best chance of restoring stability in the banking sector and protecting the Swiss economy in the short term.

But it leaves Switzerland exposed to a single massive financial institution, even if there is still great uncertainty about how successful the mega-merger will prove to be. Thousands of job losses are expected.

Taxpayers will have to pay up to 9 billion Swiss francs (US$9.8 billion) in future potential losses at UBS from certain Credit Suisse assets, provided those losses exceed 5 billion Swiss francs (US$5.4 billion). The state has also specifically guaranteed UBS a loan of 100 billion Swiss francs ($109 billion) should it need it.

The Swiss Social Democratic Party says the newly created “super megabank” increases the risks for the Swiss economy.

With a market share of around 30% in Swiss banking, “we see too much concentration risk and market share control,” JPMorgan analysts wrote in a note ahead of the deal closing. They suggested that the merged company would have to exit some companies or take them public.

The problem with one big bank in a small economy is that the government’s financial firepower may not be enough when faced with a bank run or in need of a bailout – which UBS did during the 2008 crisis.

At around 1.7 trillion US dollars, the total assets of the new entity are twice the annual economic output of Switzerland. Measured by deposits and loans to Swiss customers, UBS will now be larger than the next two local banks combined.
And at 333 billion Swiss francs ($363 billion), local deposits in the new entity represent 45% of GDP — an enormous sum even for a country with healthy public finances and low debt.

UBS is in a much stronger financial position than it was in 2008 and will need to build an even larger financial buffer as a result of the transaction.

“I was CFO [at Morgan Stanley] During the recent global financial crisis, I am aware of the importance of a strong balance sheet. UBS will remain rock solid,” said UBS Chairman Colm Kelleher on Sunday.

Speaking to analysts, CEO Ralph Hamers said UBS will aim to save 8 billion francs ($8.9 billion) annually in costs through 2027, 6 billion francs ($6.5 billion) from job cuts.

According to Capital Economics’ Andrew Kenningham, the “track record of shot-gun marriages in the banking sector is mixed”.

“Some, like ING’s purchase of Barings in 1995, have proven to be durable. But others, including several during the global financial crisis, soon questioned the viability of the acquiring bank, while others proved very difficult to implement. “


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