A major merger is the worst solution for Credit Suisse

If a big bank like Credit Suisse starts to falter, there are several ways to stabilize it: a merger with another big bank, the government taking over bad assets, the government stepping in as an open or silent partner – or full government takeover . Despite all caution when assessing such complicated situations, there is a lot to be said for the thesis: a major merger is the worst solution, and full nationalization is the best option.

A major merger like the now-planned takeover of Credit Suisse by larger rival UBS is likely to compound the problem. A strong big bank can take over and restructure or liquidate weak small banks. But when two important financial houses merge, one stable and one fragile, then – as has been shown again and again – there is a very high risk that a fragile monster will remain.

There was an example of this in Bavaria: the solid Bayerische Vereinsbank was merged with the aggressive Bayerische Hypotheken- und Wechselbank as part of a restructuring to form the Hypo-Vereinsbank. It then had problems again and was fortunately taken over by the major Italian bank Unicredit in 2005.

Credit Suisse and UBS are already too big individually for Switzerland

In the Swiss case, the two big banks alone – UBS and Credit Suisse – are already a size too big for the relatively small Switzerland, which makes it difficult for the government and the central bank to provide credible support. With that in mind, a mega-fusion is far from a good idea.

Complete nationalization is quite different. Such a solution to save the financial system has nothing to do with socialism, but with pragmatism. At a conference in Copenhagen in 2012, the then Swedish Finance Minister Anders Borg put it in a nutshell: “When a bank asks us for help, we ask: did you bring the shares with you?” This also included the experiences with a Swedish banking crisis at the beginning of the 1990s, which could only be overcome through very courageous government intervention.

>> Read here too the Handelsblatt news blog on the banking crisis

Borg outlined the appropriate procedure: take over the bank in order to take the panic out of the market, replace the management, restructure hard and then put the money house back on the stock exchange when the opportunity arises. When things are going well, the state makes a deal because it bought at zero and can then sell a healthy bank.

Something like this requires determination and competence. But without them no rescue works anyway. On the other hand, solutions in which the state steps in as a minority shareholder are problematic, as the history of Dresdner Bank and Commerzbank shows. In that case, the state bears some of the risk but has no real leverage—essentially a breach of fiduciary duty to the taxpayer. The takeover of bad assets is similarly problematic, and in today’s crisis, where liquidity is more important than creditworthiness, it is probably the wrong approach anyway.

>> Read also: UBS submits takeover bid – Credit Suisse defends itself

The otherwise quite accurate saying “The state is not the better entrepreneur” has no value in banking crises. The state is then the better entrepreneur simply because it has almost unlimited creditworthiness. And the government can use good managers, it’s not about a former state secretary taking over the leadership.

Governments and central banks will always play an important role in the stability of the financial system and will always have to intervene courageously. It is a beautiful illusion to believe that the banking world can be regulated so ideally that there are no more crises.

More: How it came to the deep fall of Credit Suisse

source site-13