On Sunday, UBS announced that it has agreed to buy Credit Suisse for 3 billion Swiss francs ($3.2 billion USD). This emergency rescue came after Credit Suisse shareholders approved the deal, which will see them receive 1 UBS share for every 22.48 Credit Suisse shares they hold. The takeover will result in a combined total of well over $5 trillion in managed assets, which means that the banks are not just too big to fail but that the Swiss government needed them to prevent the Swiss economy from collapsing.
This acquisition comes after Credit Suisse borrowed more than $50 billion from the Swiss National Bank following a 30% crash in its shares. This raised concerns about the bank’s ability to withstand a financial shock, which led to its acquisition by UBS. But what does the future hold for the banking sector, and should people be afraid as UBS and other banks continue to grow bigger?
First, it’s worth considering what led to UBS’s acquisition of Credit Suisse. The banking sector is facing a number of challenges at the moment, including low-interest rates, increased competition, and the ongoing impact of the COVID-19 pandemic. These challenges have put pressure on banks to find ways to cut costs, increase efficiency, and remain competitive.
At the same time, there are concerns about some banks’ stability, particularly those deemed “too big to fail.” This term refers to banks that are so large and interconnected that their failure could have serious consequences for the wider economy. In the wake of the 2008 financial crisis, governments around the world took steps to prevent such failures, including imposing new regulations on banks and creating special mechanisms for dealing with failing banks.
However, despite these efforts, there are still concerns about the risks posed by “too big to fail” banks. In particular, there are worries about the moral hazard created by the perception that governments will always bail these banks out if they run into trouble. This can lead to riskier behaviour by banks, as they feel that they are insulated from the consequences of their actions.
So, what does this mean for the future of the banking sector? One possibility is that we could see further consolidation among banks as they seek to increase their size and scale in order to remain competitive. This could lead to more acquisitions, like the one between UBS and Credit Suisse, as banks seek to build larger, more diversified portfolios.
However, there are risks associated with such consolidation. As banks become larger and more interconnected, the risks associated with their failure also increase. This can create a situation where the failure of a single bank could have catastrophic consequences for the wider economy.
After the 2008 collapse, the US government established more regulations (Dodd-Frank bill) and monitors the banking sector to mitigate these risks. This led to the imposing of stricter capital requirements on banks, requiring them to hold larger reserves of capital to absorb potential losses. It also increased oversight and supervision of banks to ensure that they are managing their risks effectively. However, in 2018 under the Trump administration, he repealed many of the Obama financial regulations put in place to prevent another 2008, which was a direct result of Silicon Valley Bank’s collapse.
As governments and regulators continue to monitor the banking sector, it’s likely that we’ll see ongoing changes and adjustments to the regulatory environment. Ultimately, the banking sector’s future will be shaped by a range of factors, including technological advances, consumer behaviour changes, and ongoing efforts to manage risk and maintain stability. While there may be concerns about the risks posed by “too big to fail” banks, there are also opportunities for banks to adapt and evolve in response to these challenges.
As the banking sector continues to evolve, it’s important for investors, consumers, and regulators to stay informed about the latest developments and trends. By understanding the risks and opportunities associated with different banking models and approaches, stakeholders can make informed decisions about how to navigate this rapidly changing landscape.
Overall, while UBS’s acquisition of Credit Suisse is certainly significant, it’s just one piece of a much larger puzzle. If brick-and-mortar banks want to remain viable and have the people’s trust, they must show a better propensity to protect their customers’ assets and, for the sake, high yielding dividends for their shareholders.