What happened?

A period of extreme turbulence for Swiss banking giant Credit Suisse marked by an endless list of scandals and underperformance culminated in a tie up between arch-rivals UBS and Credit Suisse. The former acquired the latter at a discounted price of $3.2 billion. The deal signifies a 60% discount on Credit Suisse’s stock market valuation and ends a period of worsening crisis for Credit Suisse.

A Frantic Week Ends In Historical Rescue Deal

The landmark deal followed hectic negotiations overseen by Swiss regulators after the Swiss National Bank’s (SNB) emergency action failed to restore confidence in Credit Suisse.

  • Credit Suisse’s share price plunged by 24% to historic lows last Tuesday after its largest shareholder – the Saudi National Bank – categorically affirmed it would not provide any further investment.
  • The SNB supplied an emergency credit line to the tune of SFr50bn ($54bn) in liquidity and it initially appeared that Credit Suisse’s share price had rallied.
  • Yet by Friday its share price fell back to just above its low on Tuesday as SNB’s liquidity lifeline failed to stem exodus of clients.

Fears over the health of the banking system spread from the US to Europe, and Credit Suisse’s share price was pummelled by diminishing confidence in its financial health as investors fled to “safer” companies.

An Unfavourable Comparison: UBS and Credit Suisse

Charting the diverging paths of the two Swiss behemoths in the period following the Global Financial Crisis (GFC) of 2007-2008 highlights the repeated mismanagement at Credit Suisse.

  • UBS seemingly fared worse from the GFC and was bailed out by the Swiss Government.
  • UBS focused on steadying the ship and learning hard lessons from the GFC while Credit Suisse appeared to carry on business as usual.
  • Their share prices have moved in opposite directions: UBS’ share price has trended upwards over the last few years while Credit Suisse’s tanked.
  • UBS made a $7.6 billion profit in 2022 while Credit Suisse’s losses topped this figure by $300 million.

How We Got Here: A Slew of Scandals Destroys 167 Years of Prestige

A litany of controversies over the past decade – including historical ones being uncovered - eroded both investor and client trust, bringing a 167-year reign to an end. Shrinking confidence in Credit Suisse was illustrated by clients withdrawing SFr111 billion ($119.5 billion) in the last three months of 2022. Deposit outflows were exceeding SFR10 billion ($10.8 billion) a day late last week.

Why is this? It is fair to say that Credit Suisse has been hit by scandal after scandal in recent years, most notably Greensill Capital, Archegos, “Tuna Bonds”, and a series of anti-money laundering (AML) failings.

Credit Suisse had recommended to its wealthiest clients investing in the funds run by Greensill Capital; the supply-chain finance business unravelled in early-2021, which resulted in the suspension and closure of $10 billion worth of Credit Suisse client funds that will not be recovered entirely.

The Archegos Capital Management debacle led to Credit Suisse’s largest ever trading loss, a staggering $5.5 billion. Archegos Capital Management made oversized bets on just a few single stocks. It was ultimately burnt by a drop in share price of Viacom CBS that led to the collapse of the $10 billion family office and subsequent losses for Credit Suisse and other global financial institutions.

A non-exhaustive list of other scandals that swamped the Swiss bank includes:

  • Credit Suisse being ordered to pay around $475 million in regulatory fines and $22.6 million in restitution to Mozambique after the “Tuna Bonds” case, in which significant funds were embezzled.
  • Credit Suisse being found guilty by Swiss authorities of failing to stop the laundering of Bulgarian drug money between 2004-2007.
  • A global data leak of more than 18,000 Credit Suisse accounts – dubbed “Suisse Secrets” – exposed a raft of Credit Suisse clients being convicted criminals.

The various controversies that engulfed Credit Suisse placed it in a vulnerable position in which markets homed in on the “weak link” in the banking sector. And it was futilely reliant on unpredictable shareholders to step in as more stable investors had lost confidence in Credit Suisse – like shareholder Harris Associates, which starting selling up late last year.

Similarities to silicon valley bank (SVB): a Familiar Tale of Poor Governance and Risk Management

While SVB and Credit Suisse were completely different institutions, their respective failures were both rooted in a complete loss of confidence resulting from inadequate risk management. Both SVB and Credit Suisse’s share prices tanked as investors dumped its shares and depositors withdrew funds.

  • SVB collapsed on Friday 10th March after a bank run of $42 billion – a quarter of its total deposits – in one day left it unable to meet these requests.
  • The dramatic run on the lender happened due to a loss of investor confidence resulting from fears over multi-billion holes in SVB’s balance sheet.
  • SVB’s deposits plummeted in February and March of this year due to falling tech valuations and tougher operating conditions for its tech client base.
  • SVB completed the sale of $20 billion of securities on 8th March at a hit of $1.8 billion to cover the loss of these deposits.
  • On the same day, SVB also announced a $2.25 billion share sale to fortify its balance sheet.
  • But the sale of its available for sale securities portfolio at a massive loss signalled to investors it had significant vulnerabilities in its balance sheet and derailed any hopes of a successful share sale.
  • Investors subsequently fled en masse, knocking $10 billion off its share price.
  • Venture Capital investors advised their tech clients to either withdraw funds or diversify, which triggered the run that ultimately led to SVB going out of business.

The unfortunate series of events unearthed poor decision making at SVB. It failed to recognise from 2018 onwards the risks associated from its shift in strategy towards investing its swelling assets from cash in mortgage bonds maturing within one year to government-backed securities that would be locked away for a decade. SVB was over-exposed to government-backed securities, and it lost $15 billion in value from its $120 billion portfolio when interest rates were hiked last year. SVB had also taken on significant risk not matched by potential rewards: The average interest rate of $90 billion of its $150 billion portfolio was a meagre 1.64%.

Subsequent decisions to shore up its balance sheet and the timing of those announcement were also ill advised; trying to raise funds through a share sell while absorbing a huge loss gave negative signals to investors about the health of its balance sheet.

Lessons Learnt: The Importance of Risk management

The thread running through the failures of Credit Suisse (and SVB) is poor risk management:

  • Credit Suisse itself acknowledged its financial control weaknesses in its annual report a few weeks ago.
  • The Swiss regulator Finma flagged that Credit Suisse had failed to identify, limit, and monitor the supply-chain finance risk mounting in the Greensill funds.
  • Equally, the magnitude of the credit loss to one single party from the Archegos Captial situation underlined significant risk management deficiencies.
  • Repeated AML failings uncovered a deep-rooted culture of failure to carry out due diligence and ignoring risks in favour of profits.

It is fair to say that every financial services company should heed the grave penalty paid by Credit Suisse as a result of its deficient risk management practices. Despite sufficient capital buffers, investor and client faith was irredeemably damaged by those scandals, as they exposed and compounded a lack of governance, oversight and internal resilience.

Companies should prioritise:

  • Putting in place robust, top-down governance;
  • Implementing risk management frameworks that empower personnel to make timely and correct interventions;
  • Embedding a risk culture that ensures commercial considerations are balanced with risk assessments; and
  • Ensuring thorough due diligence is carried out on clients and all investments.

How can BJSS Help Financial Services Firms Better Manage Risk?

BJSS has deep expertise of working with financial services firms to manage risk and advise on regulatory requirements. We’ve worked with firms across the financial services space to introduce reporting solutions to meet compliance requirements, help firms de-risk tech and cloud strategies, and conduct due diligence. With increased scrutiny on digital and third-party resilience on the horizon in the form of upcoming national and international regulation, risk management will be at the forefront of any successful firms’ future strategy.

Our recent experience includes:

  • Design and build of a reporting solution to meet EU Markets in Financial Instruments Directive II (MiFID II) reporting deadlines for a global trading venue. We also introduced a trading control framework to detect rules violations and enhanced automated testing.
  • Helping a global exchange combat market abuse with big data, improving compliance, and control.
  • Defining a path to enhanced operational resilience and disaster recovery for a commercial bank.
  • Due diligence for a venture capital firm for multi-million pounds investments.
  • Improving the ability to identify and prioritise risks through a technology audit of an investment bank’s cloud strategy.

Want to know more?

We regularly hold sessions with financial services leaders on the best way to leverage digital solutions to achieve faster sales and profit growth. Get in touch if you’d like to know more about risk management, or our other areas of expertise in financial services. You can also click here to learn more about our work.