The consequences of the merger of Credit Suisse and UBS

This weekend it became known that UBS Group and Credit Suisse reached a purchase agreement that would avoid major damage to the financial system. As reported by Investor Times, the sale was made for $3.25 billion and would have been pushed by the authorities of the European country. It is a transaction between private companies whose main protagonists were government officials.

According to rumors from The Street and other news portals, the management of both banks would not be happy. The latter would have been evident during the press conference in which the transaction was announced. At the center of the table were government officials, while the banks’ executives were at the extremes.

In any case, the point is that the merger between the two rival banks would have gone ahead with many risks for the buyer. Although the stock market losses could be relatively reduced, a number of problems would have remained afloat awaiting solutions. It should be noted that among the main affected would be the workers of both financial institutions.

The unification between UBS and Credit Suisse “guarantees financial stability”

The central point of this unification between UBS Group and Credit Suisse would be focused on maintaining the stability of that nation’s financial system. However, this would bring additional problems for UBS, a bank that until now has been doing well and will now be burdened with other people’s problems. In any case, although the merger should be a guarantee of stability, confidence in the banking sector has not improved at all.

Investor sales of shares and withdrawals of deposits continue in dozens of banks in the West. “A solution has been found to guarantee financial stability and protect the Swiss economy in this exceptional situation,” the Swiss National Bank said in a recent statement that contrasts with the heated atmosphere.

In the midst of this scenario, the banks’ top executives did not seem happy with the takeover. The expectation is that they will now have to lay off thousands of workers from both firms to deal with the problems that have been dragging on. The layoffs would be greater than those expected before the merger and would number “several thousand”, according to the president of UBS, Colm Kelleher, and the European country’s own finance chief.

For their part, government officials, such as the above-mentioned finance minister, Karin Keller-Sutter, stressed that the worst-case scenario would have been bankruptcy. The merger of UBS and Credit Suisse would have ruled out the latter possibility, she said. Meanwhile, Kelleher stressed that the plan for this new phase is to shrink Credit Suisse’s investment business. This would be in line with UBS’s conservative risk culture, he said.

The unification of Swiss banks as seen from the outside

It is important to take into consideration that both banks have business within the United States. Hence, the central banks (Federal Reserve and Swiss National Bank) of the two countries worked closely on the process. The U.S. institutions welcomed the merger and expressed the hope that it would be a guarantee of stability for the Swiss nation.

“We welcome today’s announcements by the Swiss authorities in support of financial stability. The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is sound,” said a joint statement from the Federal Reserve and the Treasury Department.

Swiss finance chief Keller-Sutter said she had held talks with Treasury Secretary Janet Yellen and British Chancellor Jeremy Hunt to explain the impending scenarios. Among other words, he stressed that thousands of workers at the two banks would feel the impact. With that he confirmed that a major wave of redundancies is coming. This becomes one of the main problems for the two banks that recently announced the unification. As they are institutions with international presence, representatives from other countries maintain communication.

It is worth noting that both Credit Suisse and UBS already had layoff plans prior to the current crisis. That can be taken for granted that a toxic environment is approaching for thousands of households dependent on these institutions for their labor. In October 2022, the first of these banks announced a plan to lay off some 9,000 employees.

The payrolls of the two banks

As of the end of 2022, Credit Suisse had some 50,000 employees worldwide. Of these, 16,000 were within Switzerland and its balance sheet amounted to half a trillion US dollars. As for its headquarters, the investment units were in London and Singapore. Meanwhile, in the United States they were located in Boston, Chicago, Houston, Los Angeles, New York and San Francisco.

As for the technology division, it is split between Poland and India, countries where Credit Suisse employs thousands of workers. Meanwhile, its rival’s workforce is considerably larger. It employs some 74,000 people worldwide and has a balance sheet of $1.1 trillion in assets.

All this suggests that the number of layoffs will be enormous. Consequently, the number will depend on the depth of the crisis. Regardless of whether the buyout and merger have a happy ending, the fact that a crisis of confidence could be the next season should not be lost from the radar. In other words, the legacy of Credit Suisse’s problems is now being passed on to UBS. This is an uncomfortable position for investors and clients.

Considering these worrying details, the agreement with the authorities is to back up and serve as collateral in case things go wrong. Thus, UBS would have put a bailout as a condition in case the problems of the collapsed bank affect its model or revenues. This means that the central bank must respond in the event of a collapse of the mighty UBS.

The strong support of the authorities

The assurance given by the authorities to the UBS board is one of the most reassuring for investors, at least in theory. The new bank that emerges from the takeover has the full backing of the Swiss federal government’s financial power. And it could not be otherwise, given the delicate state of investor and client confidence.

Moreover, to get an idea of the dimensions of the colossus that will emerge from the merger, the size of its assets stands out. UBS’s balance sheet will now be larger than that of its competitors Goldman Sachs and Deutsche Bank. It is not for nothing that this is the largest merger in the financial sector since the 2008 crisis, which few want to talk about now.

The aforementioned crisis of confidence imported from the United States directly hit Credit Suisse, which was the weakest link. That bank was in a state of advanced trouble, so it is not surprising that its buyers would want a “defective product” guarantee. Taking all these points into consideration, the authorities have wasted no time in offering such guarantees.

The central bank responded affirmatively to UBS’s request for an endorsement for the purchase of Credit Suisse. This financial support would serve in case the latter’s problems affect it in the form of lawsuits or fines. The backing consists of 9 billion francs due to the risks the bank is taking.

UBS’s management fears that they have made a bad purchase, but officials would have left them no choice. They will now have to bear the consequences of their former rival’s problematic policies.

The argument of the forced buyout due to government pressure was allegedly based on the unwillingness of the dealmakers to go ahead with the buyout. Both managements were convinced that the restructuring plan would be successful. Nevertheless, the authorities did not want to expose the financial sector to further uncertainties and put an end to a bank dating back to the 19th century.