Why the Size of UBS is a Question

The gigantic bank created by the merger of UBS and Credit Suisse could pose competition problems in Switzerland, the president of the Swiss central bank has acknowledged. Thomas Jordan, however, defended the solution, arguing that there was no other way to avoid a much more serious financial crisis.

By agreeing to buy – reluctantly – its rival Credit Suisse, UBS, the number one bank in Switzerland, “is going to become a very big bank”, acknowledged the president of the central bank during a press conference on Thursday 23 March.

Thomas Jordan also admitted that this merger will raise “competition issues”. In fact, the size of the bank that will emerge from this union will create “a new situation”, according to him, that the central bank and the regulatory authorities will have to learn to manage.

“We will have to make sure in the future that there will be enough competition in Switzerland to provide banking services,” he warned, while reaffirming that the Swiss banking system is “robust” and “resilient”.

Competition beware

This statement by the Swiss central bank is not insignificant. In Swiss business circles, voices were quickly raised to warn of the repercussions of this takeover for companies. On Tuesday, the federation representing small and medium-sized businesses expressed concern about financing conditions if competition is reduced.

In an interview with AFP, Philippe Cordonier, a member of the board of Swissmem, the organization that represents machinery and electrical equipment manufacturers, also expressed alarm about the risks to costs, “if there is only one big bank left that has the capacity to work abroad.” “This will restrict the choice of solutions for companies,” he fears, as Credit Suisse has been a partner of choice for Swiss exporters until now.

As both banks are active in retail banking in the Alpine country, some are also concerned about the consequences for choice in mortgages. The Competition Commission, however, had no say in the merger.

On a global level, UBS will become an unrivalled giant in asset management. The Swiss bank already occupies this position, while Credit Suisse is neck and neck with the American Morgan Stanley for second place.

Even more risks for the financial system

With this forced marriage, UBS will find itself at the head of more than 5,000 billion dollars of invested assets and 3,400 billion dollars of assets under management. Even before their union, the two banks were already among the 30 banks worldwide considered too big to fail.

The Financial Stability Board, set up by the G20 following the collapse of the American bank Lehman Brothers in 2008 to better supervise the banking system, draws up an annual list of banks considered systemic. They are classified according to the risks they pose to the global financial system. They must comply with stricter requirements, particularly in terms of the capital they must set aside to withstand a crisis.

The most stringent rules apply to the US bank JP Morgan Chase. UBS is likely to jump up the rankings, as the combination creates a bank with far greater risks to the financial system, which the Swiss authorities will also have to learn to manage.

The best solution, according to the Central Bank

The fact remains that this takeover of Credit Suisse by UBS was the only “feasible solution”, said Thomas Jordan, stressing that “the pressure of time was enormous”. Confidence in Credit Suisse had collapsed rapidly last week. To regain it, the Ministry of Finance, the Swiss central bank and Finma – Switzerland’s market watchdog – engaged in a race against time over the weekend.

The central bank’s priority was to “maintain financial stability” and avoid a much more serious financial crisis that would have “immediately” hit Switzerland, but also the international financial system, the central bank president said. “It is obvious that we looked at all the solutions that existed,” he said.

Many people in Switzerland are wondering why the authorities did not opt instead for a sale to a foreign bank or an orderly bankruptcy, which would have allowed time to recover the healthy assets of Credit Suisse and liquidate the others. But according to Thomas Jordan, an orderly bankruptcy would have “instead” risked triggering an “even bigger” financial crisis, he said.

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