The passing of a year puts an ironic twist on the annual exercise conducted by the US central bank.
A small coterie of highly specialized technocrats at a very select number of major banks around the world are likely putting in overtime right now as they gear up for this year’s round of annual stress tests conducted by the Federal Reserve.
The hypothetical scenarios were released late last week and there is an amusing wrinkle this year even though nothing has much changed from the ones in 2023. Credit Suisse is subject to the brunt of them while UBS is not.
Consolidated Subsidiary
If you had told anyone a year ago that the former would ever be a subsidiary of the latter, you would not have been taken all that seriously.
Bankers working in financial centers worldwide, clients, and people walking the streets of Switzerland would have thrown a few quizzical glances your way and little else.
Free Pass
Most in the know realized Credit Suisse was in trouble but were not aware of how bad the situation was. Still, the industry was weeks away from that Sunday in late March when the government-prompted rescue of Switzerland’s second-largest bank was announced.
So here we are. UBS’s subsidiary, reduced to being an aggrandized unit, is being tested as a large bank as well as its ability to withstand a global market shock and counterparty default. UBS, on the other hand, remains listed by the Fed as a large bank while otherwise seemingly getting a free pass – even though it would also fall victim to any failures on the part of Credit Suisse.
Biggest Ever
You can kind of get your head around it. The heyday of the pre-financial crisis juggernaut that was the former UBS is well and truly gone.
For those who might not remember, the bank still holds a Guinness Book of World Records entry for having the world’s largest single trading floor «ever» in Stamford, Connecticut. That was, however, a good five years before the first iPhone came along.
Full-service Broker
Now, the substance of what is left mostly likely relates to its full-service brokerage business that had its original roots in the former PaineWebber, which it bought on the cusp of the millennium.
Credit Suisse, for its part, never went down the same brokerage path and, grossly simplified, was always about investment banking and financial market trading in the US.
Another Year
That leaves us with a current, very unintentional conundrum between the tester and the testee - although we will have to wait another year to see how it all plays out.
By then, the Credit Suisse legal entity will be fully integrated according to the roadmap that finews.com discussed earlier this month at some length.
Little Patience
The average technocrat on either side of the stress tests would likely read this with relatively little understanding, or patience, maintaining unabashedly that it is the underlying businesses being examined, not their ownership or the legal entities.
Still, there is a larger, simpler reality we can all get our heads around.
Cutting Risks
UBS’s progress in cutting the risk out of Credit Suisse businesses will potentially be measurable by next year’s test results. For one, it will provide a much better picture than the analyst-heavy reporting of the quarterly reduction in risk-weighted assets.
Moreover, a key sign that the bank has achieved success will be whether it can get rid of one - or both - the offending «Xs» plonked in the middle of the Fed’s table.
