Brace for significant shifts in business operations as UBS, one of the world’s largest and most influential banks, readies for the monumental takeover of its competitor, Credit Suisse.
As the day of fusion approaches, there is a palpable sense of anticipation and stringent restrictions prepared for the incoming Credit Suisse bankers.
A red line approach to banking practices
UBS has outlined nearly twenty-four business practices, aptly referred to as “red lines,” meant to drastically curtail the risk profile of Credit Suisse operations once absorbed by UBS.
A focused strategy is in place to mitigate any ‘cultural contamination’ resulting from this merger. In UBS Chair, Colm Kelleher’s words, “We are going to have an incredibly high bar for who we bring into UBS.”
These incoming restrictions, drafted meticulously by the bank’s compliance department, are aiming to protect UBS from inheriting a financial institution that has demonstrated an arguably more relaxed attitude towards risk.
Prior to this takeover, Credit Suisse’s financial history was marred by crises and scandals, a factor heavily attributed to their reportedly lackadaisical approach towards managing risk.
Swiss authorities had orchestrated this takeover three months ago in an effort to prevent the collapse of Credit Suisse.
UBS and the Swiss government finalized a safety net agreement that pledges up to SFr9 billion ($10 billion) to UBS to cushion against any losses arising from the takeover. This financial backstop becomes operative after the bank covers the initial SFr5bn in losses.
Operation Restrictions and Risk Limitation
UBS’s proposed “red lines” cover a spectrum of operational and non-operational risks. Certain restrictions are broadly operational, covering issues like research distribution and office utilization. However, other regulations directly impact core business areas of Credit Suisse.
Credit Suisse’s bankers will now find themselves unable to deal in an array of specialized financial products, including specific Korean derivatives and options tied to quantitative indices.
Even large asset-backed loans exceeding $60 million, like those underpinning the purchases of yachts, ships, and real estate, will now require approval from the bank’s executives.
The restrictions also extend to geographical considerations. UBS’s red lines restrict Credit Suisse bankers from entertaining new clients from high-risk countries, such as Libya, Russia, Sudan, and Venezuela.
This prohibition is a critical step towards limiting the risk of potential money laundering and corruption.
Credit Suisse’s staff received a company-wide memo recently, advising them of the upcoming changes, although specific regulations were not disclosed at the time.
The merger’s finalization will mark the beginning of a new chapter in UBS’s journey, a chapter that will hopefully be devoid of the risk-related turmoil that once haunted Credit Suisse.
On a final note, Swiss parliamentarians have empowered a special parliamentary commission to investigate the circumstances leading to Credit Suisse’s downfall.
As the financial institution sets its sights on the future, it’s clear that the lessons from the past will not be easily forgotten. Both UBS and Credit Suisse declined to comment on the impending changes.