What’s wrong with Credit Suisse?

                    

Credit Suisse is one of the biggest global banks in the world. It is so huge that it generated a revenue of $22 Billion, operates in 50 countries, and its assets under management (AUM) alone amount to $ 1.1 trillion. Still, in the past year, something crazy has happened. They lost more than $ 15 billion in 2 terrible investments, reported five quarters of loss in the last seven quarters when all global banks reported profits and laid off 5000 employees. Combined with the pandemic, the Russia and Ukraine war United kingdom’s economic turmoil, all of them have put this giant bank at significant risk.

In 2008, when almost all banks around the globe were facing some deep crisis, the Lehman brothers and Bear sterns collapsed, and Morgan Stanley and Goldman Sachs were on edge. AMRO, ABN, GE Countrywide, Dresdner Bank, and Merrill Lynch must undergo mergers for their survival. Despite this terrible situation Credit Suisse came out unscathed. That could be ascribed to Credit Suisse being more focused on wealth solutions, and their investment banking business was not as aggressive as others. One argument could be the 2008 event made Credit Suisse too optimistic.

Many big scams and losses can be observed in recent years, leading to two things. First, Aggressive investment banking and its incentive structure led to excessive risk-taking by the sales team. Second, Credit Suisse gave the sales and business development teams the liberty to overrule the risk and compliance team, which triggered some bad decisions. Out of which, some significant setbacks are:

The first would be in March 2021, when Greensill capital went bankrupt as Credit Suisse has exposure of $10 billion. Greensill capital was a financer of the supply chain, and these receivables were securitized, converted into bonds, and sold as an asset to clients. Only part of the fund is recoverable and ends up with losses rest is dependent on insurance claims and their realizable value. The second would be Archegos Capital Management, which Credit Suisse heavily funded and ended up losing $5.5 billion. This loss could have been lower if it exited from the position like Morgan Stanley and Goldman Sachs did. Third would be facing criminal money laundering charges for handling cash for cocaine traffickers. Credit Suisse was also fined £350 million for a Mozambique tuna bond scam, the loan arranged for the Republic of Mozambique. Credit Suisse has also funded some high-risk assets like superyachts and chartered plains for Russian oligarchs, which became trouble as Russia Ukraine war started.

The most significant source of worry for Credit Suisse is CDS (Credit Default Swap), Which shoots up to a record high, i.e., above 250. Currently, other banks have CDS below 150. The probability of Credit Suisse CDSs getting into bankruptcy is 23%. Which makes people think Credit Suisse is becoming Lehman Brothers of the EU.

Like Lehman Brothers, Credit Suisse may indicate the bigger problem, which might have several other parts. First, Inflation is rising and about to touch double-digit. That forced the European Central Bank (ECB) to adopt a hawkish policy and make the cost of funds very high to control Inflation. Second, the Energy crisis that the EU is currently facing. The prime concern of many European energy companies is their dependence on Russian gas and continuous supplies. They may have to file for bankruptcy. Third, trillions of dollars invested as European pension assets are now facing a unique problem. These bonds are billions of dollars in losses due to higher bond yields. All these factors will might compound the issue for Credit Suisse.

Most likely, Credit Suisse will not be the Lehman Brothers of Europe. The banking system is much more sound, and systematic risk management is more vigorous than in 2008. Credit Suisse also has huge capital to withstand losses, and they still have a better liquidity coverage ratio of 1.91. The survival of Credit Suisse through the crisis lot will depend on how the management will present the restructuring plan on the 27^th of October when they announce their September quarter results.

Ankit Yadav

Being boring is best.