Union Bank of Switzerland and CS Holding, two of the big three Swiss banks, said yesterday that they were in discussions about a pounds 32bn merger.
Analysts believe at least 15,000 jobs in Switzerland and possibly hundreds of jobs in London are at risk if the deal, to be discussed at a UBS board meeting tomorrow, goes ahead.
The international investment banking operations of UBS and CS Holding, parent of Credit Suisse and CS First Boston, both have large numbers of staff in London, in the City and at Canary Wharf.
Although the two would fit well on the corporate finance side there are thought to be substantial overlaps in the bond trading and derivatives businesses of the two banks in London, which is bound to lead to rationalisation and job losses.
The announcement came days ahead of a shareholders' meeting next Tuesday at which Martin Ebner, a dissident shareholder, will attempt to prevent the promotion of Robert Studer, chief executive for the last eight years, to the chairmanship. CS Holdings said it was not planning to vote with Mr Ebner, who has been a thorn in the side of UBS for years.
If a merger goes ahead, it would create a powerful rival to the third big force in Swiss banking, Swiss Bank Corporation, which last year attempted to leapfrog the others in international investment banking by taking over SG Warburg. CS Holding's market value is Sfr 21.1bn (pounds 12.4bn) and UBS is worth almost pounds 20bn. Their combined assets amount to pounds 470bn.
The proposed merger would reshape Swiss banking, where the two groups have well over half of the domestic market, but with substantial excess capacity that analysts say will have to be rationalised.
In a day of confusion in the markets which saw CS Holding's shares soar nearly 6 per cent following a report of the proposals in a Swiss newspaper, Union Bank of Switzerland spokeswoman Gertrud Erismann said a UBS board meeting would take place this week to discuss a possible merger with CS Holding. There is to be an announcement by the end of the week. Earlier, CS Holding said a telephone conversation took place last week between CS Holding chairman Rainer Gut and UBS chairman Nikolaus Senn in which the possibility of discussing a merger between the two banks was "sounded out". Mr Gut said: "It's up to the UBS board of directors to make up its mind about the proposal."
The conversation included a discussion of Martin Ebner, the Swiss investor who has built up a substantial share in UBS and who has been running a campaign against the policy of the bank's senior managers through his company BK Vision.
"In this conversation, CS Holding denied rumours that it intended to support BK Vision at the coming general meeting [of UBS]," the statement said. Mr Ebner at one stage controlled 20 per cent of UBS's registered shares but has cut back to 5 per cent, plus an unknown proportion of bearer shares.
The statement added that Mr Gut had raised the question of whether both bank chairmen should talk at some point about the possibility of merging the two institutions to keep up with the pace of global competition.
The statement said Mr Senn had raised similar points in a recent interview and told Mr Gut he would think it over and get back to him at some stage.
CS Holding appeared to rule out a hostile bid, which would in any case be highly unusual in Switzerland. It said that " ... the question of the benefits and possibilities of a merger between two equal companies were not put on the same level as any intention by CS Holding to take over UBS".
Analysts believe that other options than a full merger of the world-wide banking businesses cannot be ruled out, and a deal might even be limited to rationalisation within Switzerland, where UBS's record in tackling overcapacity has been one of Mr Ebner's main criticisms.
A merger would continue an international trend towards bank rationalisation that has seen the merger of Chase Manhattan and Chemical Banking in the US and Bank of Tokyo and Mitsubishi Bank in Japan, a deal that created the world's largest bank.