Creditsuisse: A Cautionary Tale of Strategic Failures

Creditsuisse's story is a cautionary tale of strategic failures that can serve as a valuable lesson for businesses and investors alike.

The bank's struggles began in 2020, when it reported a net loss of $2.6 billion in the first quarter. This was largely due to a significant decline in trading revenue.

One of the key factors contributing to Creditsuisse's woes was its over-reliance on a few large clients, including Archegos Capital Management. This concentration of risk proved disastrous when Archegos defaulted on a massive margin call in March 2022.

As a result, Creditsuisse was left with a massive hole in its balance sheet, forcing it to sell off assets at a significant loss.

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The crisis at Credit Suisse was not a sudden event, but rather the culmination of a long period of declining trust and asset withdrawals.

Four possible explanations can help us understand the apparent contradiction of a 'sound' bank that fails.

A pure bank run, caused by a random event like a market downturn, could have triggered a self-fulfilling prophecy where customers withdrew their deposits, leading to a liquidity crisis.

Regulatory indicators may not have been suitable for identifying a crisis of confidence in a timely manner, providing no information about the bank's strategy, business model, or management quality.

Regulatory indicators may have provided an incomplete picture of capital and liquidity, with 'trapped capital' limiting the dividend capacity of the parent bank.

The liquidity and capital might not have been sufficiently fungible within the group, with foreign supervisory authorities ring-fencing capital in local subsidiaries.

In the case of Credit Suisse, some market analysis feared that 'trapped capital' would limit the dividend capacity of the parent bank, raising questions around the accounting and regulatory treatment of participations.

Market participants were questioning the relevance and transparency of the published indicators, which may have contributed to the loss in confidence.

There are four possible explanations for the crisis at Credit Suisse:

Credit Suisse's collapse was a surprise to many, but one of the puzzles is that it comfortably met all regulatory capital and liquidity requirements.

Credit Suisse's CET 1 was stable at almost 15% and the leverage ratio for total loss absorbing capacity was 15%, both ratios about one-third higher than the requirements.

The bank's liquidity ratios were also way above the requirements, despite a dip in the fourth quarter of 2022.

The TBTF regime, which is designed to prevent the collapse of systemically important banks, was put to the test with Credit Suisse's failure.

However, the authorities ultimately chose not to use the bail-in option, which raised questions about the regime's effectiveness.

The authorities emphasized that the bail-in would have been possible, but the implementation of a global restructuring of Credit Suisse would have been complex and risky.

In fact, the involved domestic and foreign authorities expressed the view that the preparation had been sufficient and that implementation of a bail-in would have been supported and recognized by the members of the Crisis Management Group.

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However, the Swiss troika ultimately determined that the merger with UBS entailed fewer execution risks and was therefore preferable.

The main lesson is that the TBTF regime is not broken, but there are still technical hurdles to be addressed.

One of the main execution risks identified by the Expert Group is that the conversion process in some jurisdictions, such as the US, could be a lengthy process, not possible to complete over a weekend due to the demands of the US securities act.

FINMA, the Swiss financial regulator, carried out extensive supervision of Credit Suisse, conducting 43 preliminary investigations and issuing nine reprimands.

FINMA also recognized the potential risk of the bank's destabilization at an early stage and intensified its supervisory activities accordingly.

In summer 2022, FINMA asked the bank to put in place specific measures in preparation for a crisis, such as the sale of parts of the business, and later also the sale of the whole bank.

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Credit Suisse Floating Rate High Income's investment strategy is a blend of thorough security selection and a risk-conscious approach. This disciplined approach has been a hallmark of the fund's success.

The fund's People rating has been downgraded to Above Average from High due to the sudden departure of one of its lead managers.

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As the global financial landscape continues to evolve, Creditsuisse is well-positioned to adapt and thrive.

The bank's strong presence in Asia, with a significant market share in countries like China and Japan, will likely remain a key driver of growth.

Innovative digital solutions, such as its blockchain-based trading platform, will play a crucial role in streamlining operations and improving customer experience.

By leveraging its vast network of international clients and partnerships, Creditsuisse will be able to capitalize on emerging opportunities and stay ahead of the competition.

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

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Earnings remained volatile in both the investment bank and asset management, despite the best efforts of the Board. This lack of consistency was a major contributor to the bank's downfall.

Recurrent scandals severely damaged the bank's reputation, causing clients, investors, and the market to lose faith in Credit Suisse. This loss of confidence had a ripple effect, weighing heavily on the bank's results.

The bank's problems were widespread, affecting various business areas and risk types. In almost all of these cases, serious deficiencies in risk management played a significant role.

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

These issues, combined with the bank's inability to manage risk effectively, ultimately led to its collapse.

To assess the future performance of CSHIX, we need to consider three key pillars: the process, the people, and the parent organization.

The Process Pillar evaluates how sensible, clearly defined, and repeatable CSHIX's performance objective and investment process is. This includes security selection and portfolio construction.

A high-quality management team is essential for delivering superior performance relative to benchmarks and/or peers. The People Pillar assesses the management team's experience and ability.

The Parent Pillar is our rating of CSHIX's parent organization's priorities and whether they're in line with investors' interests.

Here are the three pillars that will influence CSHIX's future performance:

Credit Suisse was different in its predicament, on the brink of resolution during the weekend of March 19th, but years in the making due to persistent losses, scandals, flawed strategies, and poor risk management practices.

Its share price had plummeted by over 90% since 2021, while the STOXX Europe index of banks had seen an increase of approximately 10% during the same period.

The bank's downfall and resolution may have had a dramatic impact on other financial institutions, with the memory of Lehman Brothers fresh in the minds of the Swiss authorities.

Several options were considered to resolve the crisis, including a resolution of Credit Suisse, declaring the point of non-viability and triggering the bail-in and conversion of bail-in-able bonds, a temporary public sector ownership, and a merger with UBS.

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The merger was considered the least risky option, with UBS offering $3 billion to acquire Credit Suisse and additional public support.

A public support package was provided, consisting of liquidity assistance totalling CHF 250 billion from the SNB, with CHF 100 billion backed by a federal default guarantee, referred to as a public liquidity backstop (PLB).

A PLB had been under discussion and review for years, but was enacted as emergency legislation due to principled resistance against any public sector involvement.

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