What next in the banking crisis?

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Some calm has returned to the financial markets. But the concern remains whether the banking crisis is really over after the takeover of the stumbling Credit Suisse by UBS.

Headquarters of Credit Suisse and of UBS in Zurich

One reason for concern is the size of what is now the only major Swiss bank, the “new UBS”. “A zombie is gone, but a monster is emerging” – this is how the Neue Zürcher Zeitung commented on the emergency merger of Credit Suisse with its long-standing competitor at the beginning of the week. “The risk is initially subdued because the weak candidate is being taken out of the market and is being massively supported by a stronger, roughly twice the size of the acquiring bank,” says Martin Lück, German chief strategist at Blackrock, the world's largest asset manager.

In addition, this is strongly secured by additional guarantees. But: “Of course, this also creates a monolith, a much larger bank, which is then all the more too big to fail and systemically important.” With total assets of almost 1.58 trillion euros, the new bank will be twice the size of Switzerland's gross domestic product. The bank is already active worldwide – both in wealth management and in investment banking. One reason why the major central banks agreed last weekend to expand commercial banks' short-term dollar borrowing opportunities. This is intended to avoid a liquidity shortage in the global financial system.

The rescue for Credit Suisse was apparently just around the corner in good time

Heavy cuts are inevitable

With the merger, the previous management of UBS now faces a Herculean task. The Board of Directors is headed by the experienced investment banker Colm Kelleher, who worked for the US investment bank Morgan Stanley for 30 years, which he also steered through the financial crisis as CFO between 2007 and 2009. Since 2020, operational management has been in the hands of the Dutchman Ralph Hamers, previously head of the major bank ING. He has to clean up now.

Up to a fifth of Credit Suisse's 50,000 employees could lose their jobs as a result of their bank's demise. “There are huge overlaps in the business models,” says Martin Lück from Blackrock, referring to the asset management and investment banking divisions. “It will take significant cuts to make this bank profitable.”

Hamers worked for the Dutch financial group ING for almost 30 years before his appointment to the head of UBS in September 2020. After the financial crisis, he restructured the bank, which he had headed since 2013, and also converted it into a modern, digitally innovative bank. His reputation has been damaged because of a money laundering scandal that the bank settled five years ago with a settlement payment of 775 million euros. But there is still an investigation against him to find out why the ING group under Hamers' leadership failed to fight money laundering. 

UBS boss Ralph Hamers (photo from 2020)

The Swiss banking regulator Finma is now faced with an even bigger task. Criticism of the lack of supervision of Credit Suisse, whose difficulties have been known for months, has been heard in isolated cases. Should supervisors have looked earlier and, above all, acted? That's just one of the questions that can be heard on the market.  

What is the US Federal Reserve doing?

It will also be interesting to see which banks will now benefit from the merger. Because Credit Suisse and UBS are actually tough rivals. Many customers of one have consciously decided in favor of one and thus against the other. Others have had business connections with both institutes because they wanted to diversify. These customers could now move their accounts to other, smaller banks or asset management companies in Switzerland or the rest of Europe.

In the short term, the stock market traders are now eagerly awaiting the turbulence on the financial markets, as did the American Federal Reserve on Wednesday reacted. Will it stick to its policy of tightening to fight inflation? Commerzbank's foreign exchange expert, Antje Praefcke, writes that this is like reaching into a box of chocolates again: “As far as I can remember, the expectations before a Fed interest rate meeting have never diverged so widely, from 0 to 25 to 50 basis points.” That is understandable, after all the problems in the banking sector originated in the USA.