The recent events at Credit Suisse (CS) might come as a surprise to those who have hitherto viewed Swiss banks as trusted models of financial probity and calculated risk-takers, capable of operating in secrecy and guaranteeing strict client confidentiality. Switzerland’s second-largest bank, with assets exceeded only by UBS Group AG, dates back to 1856, when Alfred Escher founded Schweizerische Kreditanstalt (SKA) in Zurich to fund development of the Swiss railroad network and continuing industrialisation of the nation. The SKA name was dispensed with in 1997, and the bank became known as Credit Suisse. It has grown over the years, with the help of mergers and acquisitions, into a ‘Global Systemically Important Bank”, too big to fail and supposedly subject to “significantly higher standards for capital, funding, liquidity, and leverage requirements.”
CS’s present condition is a direct consequence of a number of scandals that have come to light over the preceding couple of years. During March 2021, the collapse of Greensill Capital, a British supply chain finance group, led to $3 billion losses for CS investors, followed by losses of $4.7 billion later that month with the default of Archegos Capital Management, a highly-leveraged US hedge fund specialising in tech stocks. In October 2021, CS pleaded guilty to making a fraudulent loan of $850 million, inclusive of kickbacks to government officials and bank executives, to two state-owned companies in Mozambique for the purchase of maritime security vessels and a tuna fishing fleet between 2012 and 2016. In February 2022, CS was alleged to have facilitated money-laundering by a Bulgarian cocaine trafficking gang between 2004 and 2008. During the same months, details of 30,000 customer accounts were leaked to Süddeutsche Zeitung, a daily newspaper published from Munich. A leak in February 2022 purported to reveal CS’s complicity in providing financial services to a variety of wealthy clients around the world, who were linked to various criminal activities such as drug trafficking, people trafficking, arms trading, money laundering, tax evasion, bribery, and embezzlement-among others.
Ulrich (‘Uli the Knife’) Koerner took over as CEO in July 2022 from Axel Lehmann, who himself followed in quick succession Tidjane Thiam, Antonio Horta-Osorio, and Thomas Gottstein. Restructuring plans were then announced by Credit Suisse Group AG on 27 October 2022. A new “simpler and more focused” CS was to concentrate on its connected franchises in global wealth management, domestic banking (Swiss Bank), and asset management. This transformation entailed radical restructuring of the Investment Bank, including a withdrawal from the Securitized Products Group. CS’s investment banking division was transferred to CS First Boston, a US investment bank and CS affiliate. The Saudi National Bank meanwhile took a 9.9 per cent stake in CS, worth CHF (Swiss Franc) 4 billion, in October 2022, making it the largest single shareholder.
Falling share prices and a soaring credit default swap rate to cover investors against CS debt have eroded investor confidence in the bank, which has experienced capital flight as clients have rushed to withdraw their funds. Come March 2023, events at CS have gathered momentum. On 14 March, CS’s annual report for 2022 declared that “internal control over financial reporting was not effective”, with “three material weaknesses” in financial reporting controls. By this time, the Saudi National Bank had decided against injecting more money to support CS’s activities, refusing to go over the 10 per cent threshold for “regulatory reasons”.
CS shares lost 24 per cent of their value on 15 March, when the Swiss Financial Market Supervisory Authority FNMA and the Swiss National Bank, Switzerland’s central bank, intervened to restore confidence in the ailing bank. That night, it was asserted in a joint press release by these institutions that “Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks”, while CS was nonetheless offered additional liquidity if necessary. This offer was soon taken up, as CS took “decisive action to pre-emptively strengthen its liquidity”, accessing up to CHF 50 billion from the Swiss National Bank’s Covered Loan Facility and an additional short-term liquidity facility to support its core businesses and clients. CS thus became the first major bank to receive an injection of liquidity since 2008 Global Financial Crisis, which has thus far failed to halt the decline in its share prices. As would be expected, lawyers have been lured in by the smell of blood. A class-action law, on behalf of CS investors, by Rosen Law Firm, a global investor rights law firm, was accordingly filed in Camden, New Jersey on 17 March.
The CS story is far from over, just as merger talks with its rival UBS are reportedly under way. Meanwhile, the financial markets remain turbulent and the likelihood of contagion within the banking system cannot be written off. All the same, it could be argued that CS’s recent scandal-ridden history sets it apart from the majority of players in the field. It is yet another example of a bank that spread its tentacles far and wide, misjudged and miscalculated its investment strategy, and ended up in a bit of bother from which it required to be bailed out. The only hope is that the bank’s “radical restructuring” strategy will help pull CS up from the hole it has mostly dug for itself.
Ashis Banerjee
PS: Switzerland’s central bank and financial services regulator brokered an emergency deal over the weekend, bypassing the need for shareholder approval. It was thereafter announced, on 19 March, that CS was to be taken over by its larger rival UBS, in the belief that this rescue merger would stabilise the Swiss banking system.