What Went Wrong at Credit Suisse?

UBS acquired Credit Suisse at £2.65bn – significantly below its closing value of around £7bn. Espionage, fraud, money laundering, controversial clients – you name it and chances are the bank was involved.

In March 2021, the bank was involved in the collapse of Greensill Capital, and then the downfall of Archegos Capital – both of which cost it billions in losses. Then in October of that year, the bank was fined $350m and pled guilty to wire fraud after it was found to have issued unaccounted loans to Mozambique in what became known as the “tuna bonds” scandal.  In June 2022 the bank was found guilty of and fined for its involvement in money laundering relating to a Bulgarian drugs ring.

Source:https://www.businessinsider.com

In February 2023,  Credit Suisse confirmed clients had pulled billions in funds in the fourth quarter (2022), which when combined with legal and restructuring costs, lead to its biggest annual loss since the financial crisis. The lender revealed a 7.3bn Swiss francs (£6.6bn) net loss for 2022, wiping out a decade of profits. 

Then the Saudi National Bank, the bank’s top backer, said it could not give more money to Credit Suisse due to regulatory constraints. That spooked investors. Severe outflows followed, which prompted the Swiss National Bank (SNB) to offer a $54bn credit line.  Regulators then spent a weekend negotiating a takeover by UBS, Switzerland’s largest bank. UBS agreed to buy Credit Suisse for £2.65bn.

Credit Suisse’s clients are mostly wealthy individuals and businesses, not everyday savers. But the repercussions of its collapse have rocked markets. That raised further concerns about the banking sector. Holders of risky Credit Suisse debt saw their investment wiped out after the government wrote down the value of these bonds to zero, resulting in a £14bn loss.

In theory, this disaster is now contained. But with rising interest rates more banks may become vulnerable. That requires central banks to be vigilant. A systemic failure will lead to a severe depression not recession. And that must be the focus of Ministers of Finance and/or Governors of central banks. We can’t afford that. Meanwhile, every step to build confidence in banks is certainly a welcome move.

For Credit Suisse, the Board/Management must have seen it coming. Pursuit of profit at all cost will lead inevitably to disaster. And the people most affected are depositors, employees, bondholders and shareholders – in that order.

Reference:

What happened to Credit Suisse? Nicole Garcia Merida, https://moneyweek.com, 22 March 2023