When UBS Group AG acquired Credit Suisse in March 2023, its board of directors thought they were doing their duty. They'd initially concluded that a merger of the two firms wasn’t desirable, but after Credit Suisse suffered a major drop in its stock price and a substantial wave of deposit and net asset outflows a few weeks later, they were urged to reconsider. Swiss officials told the board that a takeover of Credit Suisse by UBS was the government's preferred option. The alternative: widespread panic in financial markets and banking systems around the world.
Two years later, you couldn’t blame UBS for regretting its decision even with a stock price that has gained 74% since the deal was announced. With a balance sheet now dwarfing Swiss gross domestic product by almost 80%, lawmakers are rushing to contain the risk a single large bank poses. Earlier this month, the minority Social Democratic Party proposed reforms to boost UBS's capital reserves by almost $40 billion, while banning share buybacks and deferring bonuses and dividends for up to 10 years. Another proposal backed by the Swiss National Bank and regulatory body FINMA would force UBS to fully deduct the value of foreign subsidiaries from the capital of its parent, requiring it to hold an additional $25 billion of capital. So detrimental are these proposals to the bank's competitive position globally that executives are reportedly exploring relocating its headquarters to a different country.
Emergency bank mergers face two distinct risks. The first emerges even when deals succeed. JPMorgan Chase & Co's acquisition of Bear Stearns in March 2008 is a case in point. Despite government backing at the time, the bank faced years of legal battles and regulatory scrutiny. "In case you were wondering: No, we would not do something like Bear Stearns again," Chief Executive Officer Jamie Dimon wrote in his 2014 shareholder letter. "I don't think our Board would let me take the call." Ongoing regulatory costs associated with the acquisition were a turn of events that he "did not, and perhaps could not, have anticipated."
The second risk is more fundamental: unexpected landmines. Bank of America Corp.'s purchase of Merrill Lynch, encouraged by federal officials during the 2008 financial crisis, led to billions in unexpected losses and regulatory complications. CEO Kenneth Lewis later testified that officials had pressured him to complete the deal after mounting losses at Merrill were revealed, threatening to remove top management if they abandoned the merger. More recently, New York Community Bancorp – now Flagstar Financial Inc. – was initially seen as a winner after acquiring Signature Bank's assets out of receivership in mid-2023. However, the deal revealed major weaknesses in its risk management and internal controls, leading to steep loan losses, a $2.7 billion quarterly loss, and a 70% drop in its stock price, ultimately forcing a leadership shakeup and emergency capital raise.
To be sure, UBS has done a good job integrating Credit Suisse. The bank has exceeded its cost-cutting targets, retained key staff and clients, and maintained market share across critical business lines. So successful was the integration that UBS in August 2023 terminated a 9 billion Swiss franc ($10.2 billion) federal loss protection guarantee granted when the deal was announced without using it. Yet these operational successes now risk being overshadowed by mounting regulatory pressures at home.
