Taking advantage of a crisis: The upside of investment banks in supporting failing banks

Leading financial experts at Bayes Business School (formerly Cass) say big banks are willing to lean into the risks of saving troubled banks because of the massive upside that comes with doing so.

A tumultuous ten days in banking began with the collapse of Silicon Valley Bank (SVB) in the US over a week ago, with HSBC stepping in to support the UK arm of the bank. This week, the plummeting shares of Credit Suisse (CS) resulted in UBS performing a similar rescue act, in a deal orchestrated by Swiss authorities and worth $3.25 billion.

The upshot of UBS’s bailout is likely to result in tens of thousands of job cuts and the possible closure of branches as UBS looks to cut costs.

Dr Paulina Roszkowska, Research Fellow at the Mergers and Acquisitions Research Centre, said the gradual change in the industry was concerning but highlighted a bigger change in Europe and the US. She added that the benefits of tying yourself to a massive customer base and a specialist in technology offered a significant upside.

“On both sides of the ocean, a bigger change in the banking space is unfolding,” said Dr Roszkowska. “The outcome of HSBC’s acquisition of the UK arm of SVB was immediate exposure to the tech sector. The same will be true for the prospective buyer of SVB. With any troubled bank at risk of a takeover, any acquirer would be most likely taking immediate restructuring measures like cutting costs, closing branches, laying off people, and merging some functions and assets into their existing structure.

“However, they would also be getting a decent customer base and some handsome assets, which these days are often related to the tech side of banks' business: digital banking, wealth tech solutions, etc. All for the sake of becoming more efficient and competitive.

“More generally, big becomes bigger by taking advantage of a crisis. These are the first steps into ever more consolidation in the banking sector.”

Dr Sotiris Staikouras, a Senior Lecturer in Banking and Finance at Bayes, agreed that the implications of the takeovers were far-reaching, and will impact jobs, branch closures and the value of assets. He added that management will be key in ensuring parity in the future.

“Markets have reacted in the way we expected, but we also know that they are not always rational,” said Dr Staikouras. “This turmoil should be contained, but the wider implications are far reaching. Bank divisions will consolidate, branches will close, employees will be laid-off, insurers’ assets will be revalued (insurers hold significant amounts of bonds), bond values will evaporate, and reputation management will be rewired. The latter is more of a longer-term management practice.”

Dr Roszkowska said that the possible consolidation has a different driver. This time, it is customers who are the fuel of change because the bank run that started a week ago was exactly about withdrawing money from SVB and other middle-size banks to safeguard their deposits by placing them in the biggest banks. “If not for the immediate action of Janet Yellen – an extremely efficient firefighter and ‘Buddhist monk’ who calmed people down and with other regulators basically guaranteed the full value of all deposits – we would have had a massive transfer of funds to top-tier banks, leaving the smaller competition belly up.”

Although Dr Roszkowska hopes such reassurance works in the long term and can maintain competition in the banking sector, she says the fluctuation is likely to impact financial services – with fintech the sector to watch.

“Fintech is the new player in the financial services space. After the subprime mortgage crisis – which precipitated the 2008 financial crisis – the return on equity of the top ten global banks dropped from 15-20 per cent to below ten per cent, even as much as ten years later.

“There was no smooth recovery because more and more fintech companies started providing the very same services and functionalities more efficiently, at lower costs. This new competitive pressure will foremost affect mid-size banks who might not be able to survive given their traditional structures, often archaic business models, and obligatory regulatory requirements. If so, brace yourself for increased fees driven by the new “G7” of the biggest private global banks.”