Archegos make them a trio of debacles for Credit Suisse


Banking, by definition, involves risk. If you lend money to individuals and businesses, some of them will not be able to pay it back. The difference between a good bank and a bad bank is how it manages this risk.

Overly cautious bankers rob the economy of the funds it needs to fuel trade and growth – and they don’t turn a profit. Those who throw money at the wrong people at the wrong time can have big problems.

This brings us to Credit Suisse. This month, Switzerland’s second largest bank became badly entangled in the collapse of the financial group Greensill Capital. Now he appears to be the biggest loser in the spectacular explosion of Capital management of Archegos. Shares of Credit Suisse have fallen about 16% since it revealed on Monday that its losses could be “highly significant. “

So much for CEO Thomas Gottstein’s wish to start 2021 with a “blank slateAfter the bank was rocked by a series of scandals in 2020, including a former customer surrounding Luckin Coffee, who was involved in fraud.

To be fair, several major banks have been overtaken by Archegos. Even though founder Bill Hwang’s hedge fund Tiger Asia Management pleaded guilty to wire transfer fraud in 2012, investment banks were still competing to expand Archegos. over $ 50 billion in credit, which she used to build huge non-public positions in a small number of stocks.

When the prices of some of these companies started to fall, the banks rushed to unwind their positions. Nomura and Credit Suisse appear to have suffered the worst of the damage. The Japanese bank admitted to a $ 2 billion claim and the Financial Times reported that Credit Suisse losses Range of $ 3-4 billion, more than anyone else has revealed.

Yet there is a common thread in recent Credit Suisse debacles: highly concentrated exposure to an individual client or a company, or both. We are still learning the details about Archegos, but the bank must have allowed him to accumulate huge positions to lose so much so quickly.

Before Luckin Coffee filed for bankruptcy, Credit Suisse described its CEO as “dream client“For a relationship that encompasses private banking, loans and its stock offering. Likewise, with Lex Greensill, the bank was exposed in at least three ways: he was a private banking client, the group got a $ 140 million bridging loan last year and, more damagingly, the asset management division of Credit Suisse must liquidate $ 10 billion in supply chain finance funds who acquired assets from Greensill.

Insiders argue that trifecta is due to long-lasting cultural and structural issues that have been exacerbated by recent efforts to improve outcomes. Last year, Credit Suisse’s return on tangible equity was 6.6%, barely half that of UBS and its US rivals. Gottstein told investors in December he would look to increase that figure by 10-12%. But the bank’s shares traded at a substantial discount to their European peers, even before the fall of this week.

Most of the major global banks operate on matrix models: companies are divided into functional groups and also have regional reporting lines. Credit Suisse has changed its structures several times, most recently in July when Gottstein canceled changes made by its predecessor. In addition, the Swiss and Asian activities are managed separately from the functional divisions. “Everything is compartmentalized in this Byzantine arrangement. They call it experimental. I call it chaotic, ”says a seasoned banker.

The bank has struggled to keep up with large customers who deal with several different companies at the same time. The July reorganization aimed to address this problem by combining risk and compliance, and creating a committee to look specifically at these large customers. But the changes were also described as having “significant efficiency potential” and cost savings. While they improve risk management, the benefits are so far unclear.

The lack of a big picture and the pressure to increase revenue has led frontline managers to focus on approving specific transactions, rather than wondering if the bank should do so much business with a client. in particular. Insiders also complain that post-Greensill staff changes in asset management involve little fresh blood: the new manager returns to the UBS bank and his predecessor has simply been moved to another area.

Finma, the Swiss regulator, was already concerned enough about Greensill to force the bank to have additional capital in case of unforeseen risks. But that cannot be the only answer. Credit Suisse will never be risk free. What Gottstein needs to do is make sure that the risks to the bank are the right ones.

brooke.masters@ft.com

Follow Brooke Masters with myFT and on Twitter





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