Nerves were jangling hard in Europe last year, when the panic that had seen many tens of billions of dollars’ worth of deposits flee large US regional banks in a matter of hours suddenly began emerging in Europe.
European banks had enjoyed a resurgence in profits and net interest margins from rapidly rising rates without yet suffering from any rise in bad debts. But equity investors were still valuing many at substantial discounts to net asset value, implying considerable distrust. And when the problem hit Europe, it crashed against a global systemically important bank (G-Sib) and not a smaller, local player.
We will never know what might have happened if a speedy weekend solution had not been worked out for Credit Suisse after it finally turned to the Swiss National Bank for emergency liquidity support. But the speed with which concern can spread could be seen in the falling stock price and rising credit default swaps spreads at Deutsche Bank.
Credit Suisse could not be allowed to fail. Putting it into resolution may have been possible, at least technically, but it would have raised the fear of second-order effects. There was no credit contagion comparable to the sub-prime crisis of 2008 but plenty of concern about some European banks’ exposure to commercial real estate.
A bungled response would have led to a banking crisis. The contagion was starting to spread.
The situation had not been helped by the previous reluctance of some in senior positions at Credit Suisse to read the writing on the wall and seek a stronger partner. Rather they had kept raising equity capital but then failed to earn a return on it. Even the jewel in its crown, the global wealth management franchise, had turned loss making.
It is just as well, then, that UBS stood ready to salvage the wreckage of its once-great rival.
The award to western Europe’s, and indeed also to the world’s, best bank goes to UBS, for three reasons.
First, it was strong, well-run and stable enough to play the JPMorgan role in the centre of Europe and prevent a systemic breakdown.
Second, during a fraught weekend, it played its hand supremely well and developed a solution that calmed both the market panic and its own shareholders concerns.
Third, in the months that followed, it quickly completed the initial repairs on its damaged rival; regained client trust; won back scores of billions of dollars’ worth of deposits that had fled; gave many longstanding Credit Suisse bankers still running the institution hope that there was a future; made important strategic decisions; ran down non-core assets; and cut costs.
It repaid emergency support from the Swiss government earlier than expected and has got off to a very strong start in managing an unprecedented integration – the first time that one G-Sib has taken over another in the ultimate stress circumstances of a rescue takeover.
It is just as well that UBS stood ready to salvage the wreckage of its once-great rival
In the first half of this year, that process has kept on track with the merger of the parent bank groups, the transition to a single US intermediate holding company and, at the start of July, the merger of the Swiss banks.
There are complex interdependencies at play here – and UBS has continued to manage them well.
Chief executive Sergio P Ermotti pointed out in May 2024: “The merger of our parent banks is critical to facilitating the migration of clients onto UBS platforms. It will also unlock the next phase of cost, capital, funding and tax benefits from the second half of 2024. As we embark on this transitional phase of operational consolidation, we will remain focused on serving our clients, following through on our strategy, investing in our people, and acting as a pillar of economic support in the communities where we live and work.”
