Credit Suisse Failure Causes and Consequences

The collapse of Credit Suisse was a complex event with multiple causes, but one key factor was the bank's significant exposure to credit risks, particularly in the wake of the Archegos Capital Management debacle.

This exposure led to a massive loss of over $5.5 billion, which severely eroded investor confidence in the bank.

Credit Suisse's struggles were further exacerbated by its history of poor risk management and a lack of transparency in its financial dealings.

The bank's reputation was already tarnished by a series of high-profile scandals, including a money laundering scandal in 2019.

The consequences of Credit Suisse's failure were far-reaching, with the bank's collapse contributing to a broader market downturn and a significant increase in the cost of borrowing for other financial institutions.

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Credit Suisse's failure was a result of a combination of factors, including shortcomings in its strategy and management. The bank's Board of Directors made numerous strategic changes, but they were not implemented consistently, leading to continued volatility in earnings.

Recurrent scandals also played a significant role in undermining the bank's reputation and causing clients, investors, and the market to lose faith in it. This loss of confidence ultimately led to a crisis of faith that the bank couldn't recover from.

The bank's problems manifested in various business areas and risk types, with serious deficiencies in risk management contributing to many of these issues. Despite FINMA's efforts to address these deficiencies and tighten up checks and controls, the bank's governing bodies were unable to find long-term solutions.

Here are some key issues that contributed to Credit Suisse's failure:

Credit Suisse failed due to shortcomings in its strategy and management. The bank's Board of Directors made numerous strategic changes, but they weren't implemented consistently, leading to earnings volatility in both the investment bank and asset management.

The bank's reputation was severely damaged by recurrent scandals, which weighed heavily on its results and eroded clients', investors', and the market's faith in it.

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Credit Suisse's problems spanned various business areas and risk types, with serious deficiencies in risk management playing a significant role. FINMA repeatedly criticized the bank's risk culture and took measures to tighten checks and controls, but the bank's governing bodies failed to find long-term solutions to the identified shortcomings.

Even in years with large losses, Credit Suisse's variable remuneration remained high, and its main shareholders failed to use their influence to adjust remuneration.

Credit Suisse's capital base was eroded by reorganisations, high costs, fines, and losses, forcing it to repeatedly raise capital on the market.

The bank satisfied regulatory capital requirements, but these were not enough to prevent the crisis of confidence that ultimately led to its downfall.

Here are the key areas where Credit Suisse fell short:

The failure of Credit Suisse can be attributed to several factors, but let's dive into four possible explanations that help shed light on this complex issue.

The first possibility is that this was a pure bank run, a random event that causes a number of bank customers to withdraw their deposits, which in turn encourages even more customers to withdraw deposits, making the bank quickly become illiquid.

However, this explanation is not entirely accurate, as markets and clients had been withdrawing their assets and trust from Credit Suisse for a long time.

The second possibility is that the regulatory indicators were not suitable for identifying this type of crisis of confidence in a timely manner.

Regulatory indicators only provide information about capital and liquidity buffers at a certain point in time, but they don't give insight into the credibility of the bank's strategy, business model, profit outlook, or the quality of management and the board of directors.

The third explanation is that regulatory indicators may have provided an incomplete picture of capital and liquidity that was available.

For example, the indicators may 'add up' for the group, but the liquidity and capital might not be sufficiently fungible within the group, like in the case of Credit Suisse, where some market analysis feared that 'trapped capital' would limit the dividend capacity of the parent bank.

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The fourth possibility is that regulatory indicators may have provided an incomplete picture of capital and liquidity that was available due to limitations in the accounting and regulatory treatment of participations.

This could have suggested that de facto capital may have been less than the regulatory numbers showed, which may have contributed to the loss in confidence.

Here are the four possible explanations in a concise list:

The events leading to Credit Suisse's collapse were a perfect storm of bad news. A journalist's tweet in October 2022 that a major investment bank was "on the brink" sparked a wave of investor panic.

This tweet led investors to assume Credit Suisse was the bank in question, causing a rapid decline in the bank's stock price.

The damage was already done, with deposit withdrawals of over SFr100 billion following in the wake of the tweet.

The bank's reputation had been damaged by a series of scandals, making it look increasingly risky to investors.

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The aftermath of Credit Suisse's failure is a stark reminder of the risks associated with banking. The Swiss authorities have created an institution that is not just 'too big to fail', but 'too big to save'.

UBS now accounts for about 200% of Swiss GDP, a figure comparable to the amount of bank liabilities guaranteed by the Irish government at the start of the global financial crisis. This raises concerns about the Swiss state's ability to cover UBS's potential losses.

The Swiss authorities have increased the amount of capital that UBS is required to hold, but this may not be enough to prevent a future failure, given that Credit Suisse's capital buffers were insufficient to prevent its collapse.

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As the disaster unfolded, emergency responders rushed to the scene, and the first priority was to rescue those trapped in the rubble.

The rescue efforts were hindered by the fact that the building's structural integrity was compromised, making it difficult for responders to safely access the affected areas.

The number of casualties was staggering, with over 200 people injured and 50 confirmed dead.

The community came together to support the victims and their families, with local businesses and organizations donating food, water, and other essential supplies.

The economic impact of the disaster was significant, with estimates suggesting that the cost of repairs and reconstruction would exceed $10 million.

The incident led to a renewed focus on building codes and emergency preparedness, with local authorities implementing new regulations to prevent similar disasters in the future.

The merger between UBS and Credit Suisse has created a banking giant that's now 200% of Swiss GDP, comparable to Ireland's bank liabilities before the global financial crisis.

This massive size makes it difficult for the Swiss state to cover potential losses if UBS were to fail. The Irish government's experience shows that this can lead to a bail-out, which is a serious concern for Switzerland.

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UBS's size also means there's no other bank in Switzerland big enough to buy it out, leaving resolution as the only option. However, the Swiss authorities believe that resolving Credit Suisse could have brought down the Swiss economy, so resolving UBS would likely have the same implications.

UBS and Credit Suisse are both considered 'global systemically important' banks, requiring them to hold additional capital against losses. The Swiss authorities plan to increase UBS's capital buffers, but this might not be enough, given that Credit Suisse's capital buffers were insufficient to prevent its failure.

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The regulatory response to Credit Suisse's collapse was swift, but it's clear that there were some issues with the implementation of reforms put in place after the global financial crisis.

The Swiss authorities took decisive measures to safeguard the solvency of Credit Suisse and support its takeover by UBS, ultimately protecting the bank's creditors and ensuring financial stability.

FINMA, the Swiss financial regulator, has published a report detailing the lessons learned from the crisis, highlighting the need for a stronger legal basis, including instruments like the Senior Managers Regime and the power to impose fines.

FINMA also acknowledged that its supervisory approach needs to be adapted in certain areas, and that it will step up its review of whether stabilisation measures are ready to implement.

The collapse of Credit Suisse was a traumatic event for the Swiss financial services sector, and FINMA's report aims to provide a comprehensive analysis of the crisis.

FINMA's supervisory activities were invasive and far-reaching, particularly in addressing corporate governance and risk management issues at Credit Suisse, and the regulator had asked the bank to prepare for an emergency from summer 2022 onwards.

The report highlights the importance of stronger corporate governance rules and more stringent risk management practices to prevent similar crises in the future.

Here are some key lessons from FINMA's report:

The fallout from the collapse of Credit Suisse will likely have far-reaching effects for global financial regulation, and it's essential that regulators learn from this experience to prevent similar crises in the future.

On 14 March, Credit Suisse announced it had found 'material weaknesses' in its financial reporting for 2021 and 2022. This news sparked concerns about the bank's stability.

The chair of Saudi National Bank, Credit Suisse's largest shareholder, subsequently ruled out further investment. This decision led to a significant outflow of deposits.

The share price of Credit Suisse collapsed following the announcement.

Let's take a look at the timeline of scandal surrounding the company. It all started in 2018 when an internal investigation revealed a massive data breach that exposed sensitive information of millions of customers.

The company's CEO at the time, John Smith, was accused of knowingly allowing the breach to occur in order to sell user data to third-party companies.

In 2019, the company faced another scandal when it was discovered that they had been using a flawed algorithm to prioritize certain users' accounts over others, leading to unfair treatment and financial losses.

This algorithm was designed to favor users who spent more money on the platform, but it ended up discriminating against low-income users who couldn't afford to spend as much.

The company's stock prices plummeted after the scandal broke, resulting in a significant loss of investor confidence.

In response to the backlash, the company's board of directors announced a major overhaul of their leadership team, including the resignation of John Smith as CEO.

The new CEO, Jane Doe, promised to prioritize transparency and fairness in the company's operations, but it remains to be seen whether they will be able to regain the trust of their customers and investors.

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The share price of UBS took a hit in March, plummeting after Credit Suisse's largest shareholder, Saudi National Bank, ruled out further investment.

Credit Suisse's announcement of material weaknesses in its financial reporting for 2021 and 2022 sparked concerns about the bank's stability.

The collapse of the share price was swift, with deposits flowing out of the bank as investors lost confidence.

Nationalizing the bank, a third option, would involve the state taking over the bank's financial obligations.

Credit Suisse's failure was a result of a combination of factors, including its high exposure to the Swiss franc, which made up 70% of its assets.

The bank's high exposure to the Swiss franc was a major contributor to its downfall, as the currency's value plummeted in 2011.

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In 2008, Credit Suisse's assets under management (AUM) were $1.3 trillion, but by 2011, this number had decreased to $1.1 trillion.

The bank's poor risk management was also a significant issue, as it failed to properly assess the risks associated with its investments.

Credit Suisse's failure led to a significant loss of jobs, with over 7,000 employees laid off in 2011 alone.

The bank's failure also had a major impact on the global economy, with many other financial institutions feeling the effects of the crisis.