What happened to Swiss banking?
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Many people know UBS as the global Swiss finance powerhouse that it is today. But how did we get here? First, we must look at the expansion of UBS over time. In 1998, Union Bank of Switzerland merged with the Swiss Bank Corporation to create the iconic UBS brand, with 3 keys, representing confidence, security, and discretion (now pillars, principles, and behaviors). Then in 2000, UBS acquired American brokerage and asset management firm Paine Webber, which later became UBS Wealth Management USA. Finally, in 2023, when Credit Suisse First Boston was on the brink of blowing up after the Archegos Capital Management disaster, UBS came to the rescue once more and acquired the firm for 3 billion Swiss Francs.
Now that we’ve established how the UBS we know today came to be, what is going on with them right now? The Swiss government is attempting to enforce stricter capital requirements in an effort to improve the safety of the bank, especially because the main reason UBS ended up acquiring its longtime rival Credit Suisse 3 years ago was related to a lack thereof; they were letting Archegos’ Bill Hwang use up to 10x leverage when borrowing on just a few concentrated names in entertainment! Once his positions deteriorated, he was understandably unable to meet margin calls, causing about $20 billion in losses for his broker, Credit Suisse. It makes sense that the Swiss government would want to prevent another collapse of that magnitude, since Credit Suisse was acquired for 3 billion Swiss Francs, despite being valued at roughly 80 billion Swiss Francs years earlier.
But these increases in capital requirements have alternative consequences. UBS would be required to add roughly $16 billion in equity capital, dry powder it can’t lend or deploy. Forgoing an approximate 15% return on that cash would be a large hindering for the bank, and has caused shareholders Artisan Partners and Cevian Capital to call for a relocation either to other places in Europe or the United States. A possible merger with Deutsche Bank has been explored, but any venture would have to bring in or reach more US wealth clients. Analysts have also raised concerns about US banking regulation and how it might evolve if a US-based merger were to occur.
Although Citi analysts claim UBS' global competitiveness has come into question, UBS remains Asia's largest wealth manager and the billionaires’ bank of choice; it also serves thousands of American millionaires and remains a force in the Middle East and other growing markets. All told, the bank is in a great spot; it has plenty of room to pivot its wealth management business, as well as its investment banking and research divisions in Europe and the US. Although the current situation may seem startling, the bank still has plenty of legs to stand on. Whether it merges with a European bank, gets acquired or sold to an American firm, or relocates its headquarters to a jurisdiction with less stringent regulation, plenty of options remain; it would be unwise to bet against the $7 trillion Swiss behemoth.
Sources:
https://www.wsj.com/finance/banking/inside-credit-suisses-5-5-billion-breakdown-archegos-11623072713
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