Explainer: How Swiss banking giant Credit Suisse collapsed
Credit Suisse Group AG was a 167-year-old bank and a well-known name globally in investment banking and wealth management. That was until last week, when it collapsed like a pack of cards, buckling under various losses, some new and many old.
It was bought for as low as $3.2 billion by rival UBS a few days ago. The amount is paltry if one compares it with shareholders’ equity of $49 billion that Credit Suisse Group reported in its 2022 annual report.
Once an icon of the Swiss banking industry, the lender recorded a severe loss in confidence over the years, plagued with a number of scandals, issues with management, multi-billion-dollar losses, and a lackluster strategy.
Founded in 1856, Credit Suisse emerged as one of the 30 banks with the highest systemic importance, whose failure may have a significant impact on the entire financial system. It served as the private bank to a large number of business owners, wealthy and ultra-wealthy individuals, and organisations. It has over 150 offices spread over 50 countries and employing more than 50,000 staff.
Prior to the 2008 global financial crisis, which Credit Suisse managed to sail through without a bailout, the firm had more than $1 trillion in assets. Over the years, as its reputation took a beating, its assets are estimated to have nearly halved.
The final nail in the coffin came when reports surfaced of Credit Suisse’s largest investor, Saudi National Bank, with about 10% stake, declined to offer any further financial support to the lender. The Riyadh-based bank lost almost 80% on its $1.5 billion investment it had made in November 2022.
This resulted in a crash in Credit Suisse’s shares, pushing the Swiss central bank to come to the rescue with a $54 billion bailout to calm investors.
However, when the bailout did not get the desired result, the Swiss authorities pushed UBS towards the buyout.
Credit Suisse's fall from grace
The strong reputation on which the financial services behemoth built its empire, saw a steady deterioration over the last couple of decades.
Frequent management changes and allegations of irregularities in business highlighted instability that acted as a spanner for Credit Suisse’s expansion plans.
One such instance was in 2015 when the financier came under fire after Patrice Lescaudron, a French banker employed by Credit Suisse in Geneva, was found guilty of fraud, and stealing from some of the most important accounts at the firm. He was convicted of his crimes in 2018 and later committed suicide in 2020.
This was followed by other scandals that emerged in subsequent years such as in 2019 when a former top executive Iqbal Khan was spied on after he had left the company. A feud between Khan and then-CEO Tidjane Thiam is said to have been the cause of the snooping scandal.
An investigation by the Swiss banking regulator in October 2021 found five additional cases of surveillance from 2016 to 2019. Thiam was subsequently fired in February 2022.
Credit Suisse faced another hit in 2021 when one of its biggest clients Archegos Capital Management failed to repay $2 billion in March that year. The troubles were compounded when instead of looking for immediate solutions to the problem at hand, there was a delay in the calculation of the quantum of the initial exposure due to internal disagreements.
An investigation into Credit Suisse’s dealings with the collapsed U.S. hedge fund Archegos Capital revealed that the Swiss bank had failed “to effectively manage risk”. This had a huge negative impact on the bank due to a confidence deficit and destroyed more than a year's profit.
Credit Suisse was also embroiled in another scandal after it pleaded guilty to defrauding investors over an $850 million loan to Mozambique meant to pay for a tuna fishing fleet. It was found that around $200 million of the loan went in kickbacks to Credit Suisse bankers and Mozambican government officials.
Another big blow to the Credit Suisse came in 2021 when it took a multibillion-dollar hit and was forced to freeze $10 billion of supply chain finance funds to British lender Greensill in March of that year.
The Swiss bank had sold investors billions of dollars' worth of Greensill's debt, promising them in the marketing materials that the high-yield notes were low risk due to the fully insured underlying credit exposure.
Greensill Capital collapsed after losing insurance coverage for debt issued against its loans to companies.
This drove a number of investors to sue the Swiss bank over the now-bankrupt Greensill-linked funds. Swiss regulator FINMA recently said Credit Suisse “seriously breached its supervisory obligations” in the context of its business relationship with financier Lex Greensill and his companies.
The Last Leg
In a bid to save the fast-sinking financier, in October 2022, Credit Suisse’s new CEO Ulrich Koerner and Chairman Axel Lehmann assumed control of the bank and undertook a number of steps to salvage the situation. These included layoffs and multi-billion dollar fundraising, to maintain public trust in the bank.
After announcing a strategy to overhaul the bank, Koerner said that the "new Credit Suisse" will start to turn a profit in 2024.
However, the global economic slowdown and aggressive interest rate hikes by the US Federal Reserve dampened investor confidence, which cast the final blow to Credit Suisse, leaving it with no chance of recovery.
Impact on India
Credit Suisse management has advised its employees to operate as close as possible to “business as usual,” focused on serving its clients following the acquisition by UBS.
However, it is expected that Credit Suisse’s operations in India and its about 14,000 employees may feel a squeeze, as the incoming owner is likely to focus on rationalisation of resources and cutting of costs.
The management has mentioned that there will be no immediate changes to salary and bonus pay out. In case of retrenchment, the impacted staff would be informed in due course and a severance package would be provided.
Credit Suisse has assets worth around Rs 20,000 crore in India. It has exposure in the derivatives market where it funds 60% from borrowings.
The Credit Suisse crisis is unlikely to have an immediate and direct impact on India and its banking system given the protection of the Basel-III standards. Under this system, banks must maintain a liquidity coverage ratio, and the amount of money they can invest in a portfolio of held-to-maturity, or HTM, securities is capped.
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