UBS Acquires Credit Suisse: A Trust Crisis That Continues To Unravel
Poor risk management practices and a long series of scandals created an explosive mix that led to Credit Suisse’s collapse and consequent acquisition by rival UBS. Credit Suisse undermined the very definition of trust that ultimately caused its collapse. In fact, many have described the bank’s failure mainly as a crisis of confidence rather than an issue with its balance sheet. When the current crisis was still the “SVB crisis,” Forrester emphasized the importance of resilience and trust. We advised companies to improve portfolio and risk management as well as invest in trust and innovation to fill the void. With the demise of Credit Suisse, the crisis has spread to Europe and become a wider banking crisis. Here, we discuss the implications of the “rescue” of Credit Suisse by UBS.
This Isn’t A Merger — It’s A Shotgun Wedding
In a normal acquisition process, a due diligence team will review the financial health, product portfolio, risk, and technology systems of the acquisition target. But there wasn’t time for this before the forced merger of UBS and Credit Suisse. Here’s what competitors and clients of the combined firm need to know:
- Consolidating these two historical rivals will be bumpy. In 2022, the cost/income ratio for Credit Suisse was 121.7%, while it was 72.1% at UBS. The return on equity was -16.1% for Credit Suisse, while it was 13.1% for UBS. Some Credit Suisse employees are already proactively looking for new opportunities elsewhere. Many others are likely to be “sold off” as UBS divests parts of the combined entity with the greatest overlaps. Those that remain in the new combined entity will help shape a new culture energy.
- Integrating application systems will be long, costly, and painful. UBS won’t be in a position to run the application systems of the former two banks in parallel for long: This would worsen operations and increase the cost/income ratio and operational risk. Tech disentanglement (to prepare application integration and consolidation) is a lengthy process — even if carefully planned and prepared using findings from the due diligence process — and is not always successful. For example, two different European banks stopped their investment banking joint venture because the cost of disentangling the applications for investment banking would have consumed the benefits of the joint venture for many years.
- The new entity moves from “too big to fail” to “way too big to fail” — both domestically and internationally. Swiss regulators had to move fast to avoid the total failure of Credit Suisse and the worsening of the banking crisis. The forced merger created a private banking giant, however, with unprecedented concentration risk. The merged private bank is close to 10 times larger (in terms of assets under management) than the next largest private bank in Switzerland (Julius Baer) and more than twice the size of Bank of America’s or Morgan Stanley’s private banking operation.
Act Now To Protect Your Company From The Next Trust Crisis In Banking
Put simply, trust is the expectation that a person, a brand, or a bank will keep its promises, and this behavior will create positive externalities for those involved. Business customers, suppliers, and organizations that partner with banks need to:
- Reset trust assumptions: No bank is “too old to fail.” Forrester’s Consumer Trust Imperative Survey, 2022, shows that we trust companies that have existed for a long time more than we do others, such as startups or digital-only companies. Credit Suisse existed for 167 years and was integral to the fabric of Swiss economy and society. Assuming that traditional, long-standing businesses have the right “checks and balances” in place by default is a mistake; even they can abuse trust. Technology and business leaders must rely on more accurate metrics when it comes to determining the trustworthiness and risk exposure of a financial institution that they partner with. This requires strong third-party risk management processes and technologies and a dedicated governance, risk, and compliance platform to accurately assess the risk posture of their partners.
- Keep a clear focus on the trust levers that matter the most. Forrester’s trust research shows that, in Europe (specifically, the EU-5), empathy, dependability, and transparency are key levers of trust in banking. In evaluating whether you are trusting the right bank, focus on these three levers. Credit Suisse’s recent history showed cracks across all three of them. When it comes to trust, never rely on a bank’s self-assessment — our research shows that companies tend to be overly generous when assessing how trustworthy their brands are. And collect evidence to evaluate how serious banks are with their trust strategy. If they are not relying on credible accountability mechanisms, do not be fooled: They are not taking trust seriously. One bank, for example, ties trust outcomes to total shareholders’ compensation.
- Reassess key trust levers, as they evolve over time and across regions. Trust is a living thing. It shifts with cultural changes and new events, and it varies across regions. As such, the impact that different levers of trust have will evolve. A crisis such as Credit Suisse’s will most likely push up the impact that accountability and competence have on trust. These two levers, in particular, are closely linked to strong due diligence, solid reporting, and clear business decision-making. Embrace a systematic strategy for evaluating trust levers over time, and be ready to act on them.
The following analysts contributed to this research: Indranil Bandyopadhyay, Oliwia Berdak, and Ellen Carney.