The recent fallout of Credit Suisse has created uncertainty in the global banking sector. Are we facing another global financial crisis, or is this an example of an individual bank not containing risk? Credit Suisse has faced significant challenges and scandals that have impacted its reputation and financial stability in recent years.
Credit Suisse, a Swiss multinational investment bank, has experienced a turbulent time since 2015 with a series of high-profile scandals and financial losses. The troubles for the bank began post the 2008 financial crisis and included tax evasion, money laundering and other illegal activities. Poor risk management policies lead to a rogue trader losing $2.6bn in 2011, resulting in incremental regulatory scrutiny and reputational damage.
During 2018 the bank was fined $77m for incorrectly charging clients for wealth management services, and the United States, Switzerland, and France brought additional cases of tax evasion and money laundering against the bank. Again in 2020 the company was involved in two high-profile cases involving fraud and illegal activities. First was the collapse of Wirecard, a German payments processing company. Credit Suisse had been providing financing to the company who had been using fake account to inflate their revenue. Second was the collapse of Archegos Capital Management, a family office hedge fund that had amassed billions of dollars in highly leveraged positions using derivatives. Credit Suisse was one of the banks that provided finances to Archegos, resulting in a loss of over $5bn. This lead to numerous management changes, including the resignation of the CEO and senior executives.
The fall of Credit Suisse has significant implications for the banking system and investors. The loss of credibility and reputation of the bank has led to the loss of client trust and new business opportunities. The result was a significant decline in the share price, as can be seen in the below chart. To calm the market, Swiss regulators negotiated a Credit Suisse sale to UBS for $3.5bn. Simultaneously, US regulators took further steps to ensure access to emergency funding for its banks.
While it seems like much of the fault lay at their own doorstep, their demise has raised concerns about the wider banking industry’s financial risk management practices and regulatory oversight. Stronger regulatory supervision will have additional costs, systems and personnel, and lower returns for shareholders in the future. Hopefully, the incremental costs incurred will decrease the likelihood of future large fines for the sector. The banking industry needs to have stronger risk management processes and compliance checks in place to identify and mitigate risk, thus preventing further financial losses. The regulators need to be more vigilant in enforcing regulations and punishing banks that engage in illegal activities.