Archegos makes it a trifecta of debacles for Credit Suisse

Banking by definition involves risk. If you lend money to people and companies, some of them won’t be able to pay it back. The difference between a good bank and a bad one lies in how it manages that risk.

Bankers who are too cautious starve the economy of funds needed to fuel trading and growth — and they don’t make profits. Those who throw money at the wrong people at the wrong time can end up in big trouble.

That brings us to Credit Suisse. This month, Switzerland’s second-largest bank became badly entangled in the collapse of the finance group Greensill Capital. Now it looks to be the biggest loser from the spectacular blow up of Archegos Capital Management. Credit Suisse shares have dropped some 16 per cent since it disclosed on Monday that its losses could be “highly significant.”

So much for chief executive Thomas Gottstein’s vow to start 2021 with a “clean slate” after the bank was rocked by a series of scandals in 2020, including one surrounding former client Luckin Coffee, which was embroiled in fraud.

To be fair, several big banks were caught out by Archegos. Even though founder Bill Hwang’s Tiger Asia Management hedge fund pleaded guilty to wire fraud in 2012, investment banks still competed to extend Archegos more than $50bn in credit, which it used to build up huge, nonpublic positions in a small number of stocks.

When the prices of some of those companies started to fall, the banks scrambled to unwind their positions. Nomura and Credit Suisse appear to have taken the worst of the damage. The Japanese bank has admitted to a $2bn claim and the Financial Times has reported that Credit Suisse’s losses are in the $3bn to $4bn range, far more than anyone else has revealed.

Yet there is a common thread running through Credit Suisse’s recent debacles: highly concentrated exposure to an individual client or company, or both. We are still learning the details about Archegos, but the bank must have allowed it to rack up huge positions to lose that much that quickly.

Before Luckin Coffee filed for bankruptcy, Credit Suisse described its chief executive as a “dream client” for a relationship that spanned private banking, loans and its share offering. Similarly, with Lex Greensill the bank was exposed in at least three ways: he was a private banking client, the group got a $140m bridge loan last year and, most damaging, Credit Suisse’s asset management division is having to wind down $10bn in supply chain finance funds that sourced assets from Greensill.

Insiders argue that the trifecta is due to long-lasting cultural and structural problems that have been exacerbated by recent efforts to jazz up results. Last year, Credit Suisse’s return on tangible equity was 6.6 per cent, barely half that of UBS and US rivals. Gottstein told investors in December that he would seek to boost that to 10 to 12 per cent. But the bank’s shares traded at a substantial discount to European peers, even before this week’s fall.

Most big global banks run on matrix models: businesses are divided into functional groups and also have regional reporting lines. Credit Suisse has repeatedly tinkered with its structures, most recently in July when Gottstein rolled back changes made by his predecessor. In addition, Swiss and Asian businesses are run separately from the functional divisions. “Everything is siloed in this byzantine arrangement. They call it experimental. I call it chaotic,” says one senior banker.

The bank has struggled to keep on top of big clients who deal with several different businesses at once. The July reorganisation sought to address this by combining risk and compliance, and creating a committee to look specifically at these big clients. But the changes were also described as having “significant efficiency potential” and cost savings. If they improved risk management, the benefits are not obvious so far.

The lack of a holistic view and pressure to boost revenues has led front-line managers to focus on getting specific transactions approved, rather than asking if the bank should be doing so much business with a particular client. Insiders also complain that post-Greensill personnel changes to asset management involve little fresh blood: the new head is returning to the bank from UBS and his predecessor has simply been moved to another area.

Finma, the Swiss regulator, was already concerned enough by Greensill to require the bank to have additional capital for unexpected risks. But that cannot be the only response. Credit Suisse will never be risk free. What Gottstein needs to do is make sure the risks the bank runs are the right ones.

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