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By Michael Tattersall, Financial Services Research Analyst
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.
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.
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:
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.
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:
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:
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:
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