UBS shares surged as much as 10% Tuesday, on track for their biggest gain since March 2020, as investor optimism about the takeover of the bank's largest rival gathered pace.

The Swiss firm led European banking stocks higher as fears around the stability of the finance sector eased on news of UBS's emergency acquisition of Credit Suisse. UBS is poised to add almost 6.6 billion Swiss francs (€6.63 billion, $7.1 billion) to its market value since the historic deal was announced late Sunday.

The government-brokered, 3-billion-franc rescue was intended to put an end to a crisis of confidence at Credit Suisse and stem contagion through the global financial system that started with the collapse of California-based Silicon Valley Bank (SVB).

There is however also concern because of the sheer size of what is now Switzerland's only major bank, the "new UBS."

"A zombie is gone, but a monster is emerging" — that's what Swiss newspaper Neue Zürcher Zeitung (NZZ) wrote earlier this week about Credit Suisse's emergency merger with its longtime rival.

"The risk is diminishing for now because the weak candidate is taken out of the market and massively supported by a stronger acquiring bank that is about twice as big," said Martin Lück, German chief strategist at BlackRock, the world's largest asset manager.

Lück told DW additional guarantees from the Swiss state and central bank would strongly support the merger. "Of course, this also creates a monolith, an even much bigger bank, which is then all the more 'too big to fail' and systemically important."

The merger will create a new bank with total assets of nearly €1.58 trillion ($1.70 trillion) — twice the size of Switzerland's gross domestic product. The bank is already active worldwide, both in wealth management and investment banking. The sheer size of the takeover eventually forced major central banks to provide ample liquidity to smaller commercial lenders to avoid a liquidity crunch in the global financial system.

Severe cuts unavoidable

Nevertheless, UBS management faces a gigantic task. The board of directors is led by the experienced investment banker Colm Kelleher, who spent 30 years at US investment bank Morgan Stanley, which he also steered through the financial crisis as its chief financial officer between 2007 and 2009. Since 2020, operational management has been in the hands of Dutchman Ralph Hamers, previously head of the Dutch banking giant ING.

There has been speculation that as much as a fifth of Credit Suisse's 50,000 employees could lose their jobs as a result of the bank's demise. "There is huge overlap in business models," said Martin Lück of BlackRock, referring to the asset management and investment banking divisions. "That's where it's going to take significant cuts to make this bank profitable."

Until his appointment to head UBS in September 2020, Hamers had worked for ING for nearly 30 years. After the financial crisis, he restructured UBS, transforming the lender into a modern, digitally innovative bank. His reputation took a hit because of a money laundering scandal, which the bank settled five years ago with a €775 million settlement. But an investigation is still underway against him to find out why ING failed to combat money laundering while Hamers was at the helm.

The Swiss banking regulator Finma now faces a gargantuan task. It has already seen isolated criticism of its lack of supervision of Credit Suisse, whose problems had been known for months. Should the supervisory authority have looked at it and, above all, acted earlier? That is just one of the questions being voiced on financial markets these days.

What is the US Federal Reserve doing?

It will also be interesting to see which banks now benefit from the merger. After all, Credit Suisse and UBS are actually fierce rivals. Many clients have consciously chosen one bank over the other. Some clients have maintained business relationships with both institutions because they wanted to diversify. These clients may now move their accounts to other, smaller banks or asset managers in Switzerland or the rest of Europe.

In the short term, stock market players are now eagerly looking to the US Federal Reserve to see how it reacts to turbulence on financial markets. Will the American central bank stick to its tightening course to combat inflation?

Commerzbank currency expert Antje Praefke says this is "the one billion dollar question."

"To my recollection, expectations have never diverged so widely before a Fed rate meeting [scheduled for Thursday] with a hike likely between 0-and-25-to-50 basis points." After all, the Fed has to lead the way, since the current banking troubles have once again originated in the US.

Edited by: Jon Shelton

This article was originally published in German.