How long will it take for bank regulators to recognize that bank mergers are a path to destruction of business, employment, competition and value? Where does the legitimacy of their actions rest?
The world of banking bail out is gone.
As the banking world, in a self-inflicted way, went into the Great Financial Crisis (GFC) , world regulators embarked into a set of measures to move away from bail outs into bail ins. It consists of a series of actions that will allow a bank to survive beyond a liquidity crisis and reinforce its equity precisely to avoid that a run on the bank from deposits precipitate a solvency crisis.
Swiss regulators -not part of the European Banking Union- would take an enormous responsibility to merge the two banks by forcing UBS to acquire Credit Suisse. Credit Suisse does not need to be bailed out. The acquisition by UBS threatens not only Swiss financial stability, but could trigger a worldwide banking crisis of enormous proportions.
If UBS requires $ 6 billion first loss guarantee,  while Credit Suisse had CHF 48 billion at the end of 2022, stable from the previous year, the bank has the means to respond to a CHF 10 billion reduction of deposits as it had CHF 293 billion at the end of last year. Why would $ 54 billion of bail in able bonds converted into equity be insufficient?
Question 1: How can regulators justify a bail out?
Regulators are not shareholders
Switzerland is preparing to use emergency measures to fast-track the takeover by UBS of Credit Suisse, according to three people familiar with the situation, as the banks and their regulators rush to seal a merger deal before markets open on Monday. Under Swiss rules, UBS would typically have to give shareholders six weeks to consult on the acquisition, which would combine Switzerland’s two biggest lenders. Writes the Financial Times this Saturday.
Where does the sovereign authority come from to substitute itself from what is at the end a shareholder problem. It is not the duty of a regulator to try to fix a stock price. Yet over 6 months, Credit Suisse lost 60% of its value during a period when banking stocks have also been beaten following the increase of short- and long-term interest rates. Swiss National Bank’s interest rates moved from -0.20% to 1%. Nothing dramatic compared to EUR and USD central bank rates.
Question 2: How can political authorities replace private shareholders?
Needless to say, the market share of a combined UBS and Credit Suisse would explode to at least 40% with the next one at 7%: how will the Swiss Conseil d’Etat accept such a dominance of one single banking group? One of the consequences of the GFC has been the creation of a category of banks that are globally systemically significant. This select group of banks include Credit Suisse.
Where were the Swiss regulatory authorities and the Financial Stability Board (FSB) during those last months? Those banks “benefit” from a higher ratio of capital adequacy under the Basel III rules. The requirements for G-SIBs … are “higher” in the sense that they are additional to the minimum standards that apply to all internationally active banks under the Core Principles of the BCBS, explains the FSB
If Credit Suisse must be taken over by another bank for solvency reasons, it is a condemnation of the entire banking regulation of the last banking crisis.
Question 3: Can we afford a weakening of the SIFIs by not forcing them to resolve their own problem.
Are the Swiss authorities panicking?
One would understand why the Swiss authorities would do what they do well: protect themselves from the consequences of a situation in which they bear a huge responsibility?
The takeover by UBS might give the impression that the authorities found a solution: however, that particular solution is detrimental to the image of the country that benefits from a reputation that largely exceeds its size, particularly as Switzerland is on of the most sought after country for wealth management and foreign assets.
The simple fact that no other solutions has been looked at seriously says it all: Credit Suisse is not in bankruptcy and its management has been restructuring the bank. The Swiss National Bank will be responsible for not preempting this situation that has, of course nothing to do with banks in the US whose size is one thousandth of Credit Suisse.
Question 4: Was there no alternative to the UBS merger or did the authorities choose the path of least resistance?
What about the people: a long leadership crisis?
The least consideration of all financial crisis has always been the people.
The clients are treated as a commodity that is transportable from one bank to the other because the authorities so decided.
What about the 50,000 employees whose jobs and lives will inevitably be threatened by this merger? By doing this transaction within Switzerland, the Swiss authorities maximize the risk for national reasons.
Credit Suisse had leadership issues: forex manipulation in 2013, tax fraud conspiracy in the US (2014), Malaysia Development Berhad Scandal (2015), Mozambique secret loans scandal (2017), US Foreign Corrupt Practices Act violation (2018), Espionage scandal (2019), Greensill Capital (2021), Archegos Capital (2021), Drug money laundering scandal (2022) and Russian oligarch loans documents destruction after the invasion of Ukraine.
This points to an array of governance failures, and maybe a dubious culture. One remembers that Credit Suisse boss António Horta-Osório resigned over Covid breach by attending Wimbledon tennis championship when he should have been in quarantine and using private planes to do so at the cost of the bank.
Have the authorities been complacent?
Question 5: Could another solution have provided a better leadership and employment solution?
Without being inside the negotiations that are taking place, one does not have the full picture: what this blog does is raising questions that, should Switzerland pursue the merger between UBS and Credit Suisse, they will need to respond, not only publicly, but also in front of the courts.
Nothing forces a solution to be found this weekend. It is time to make a serious cost/benefit analysis before jumping to what appears to be a damaging solution.