Switzerland has long been known for its reputation as a trustworthy and discreet banker to the wealthy elite. However, this reputation is now being challenged due to the scandals, legal disputes, and increasing financial losses faced by Credit Suisse Group AG. The recent developments in mid-March have only added to the unease surrounding the bank’s mounting problems, leading to a significant drop in its shares. As a result, the lender has had to borrow up to 50 billion.01 francs ($54 billion) from the Swiss central bank to restore market confidence, which is a noteworthy turn of events given the country’s established position as a global financial hub.
The Problem
The unraveling of Credit Suisse’s reputation has been the result of a string of serious missteps, spanning across multiple continents and areas of business. The bank’s transgressions have ranged from a criminal conviction for money laundering on behalf of drug dealers in Bulgaria, to its entanglement in a major corruption case in Mozambique. The situation was further exacerbated by a spying scandal involving a former employee and a senior executive, which resulted in significant reputational damage for the institution. A massive leak of client data to the media was yet another blow to the bank’s already tarnished image.
In addition to these missteps, Credit Suisse’s association with disgraced financier Lex Greensill and failed New York-based investment firm Archegos Capital Management served only to compound the sense of an institution that was struggling to maintain a firm grip on its affairs. The fallout from these scandals and failures has been significant, with many clients losing confidence in the bank and opting to withdraw their assets in late 2022, resulting in unprecedented client outflows.
The root causes of Credit Suisse’s downfall are likely multifaceted and may include issues related to internal control, corporate culture, and risk management practices. The bank’s leadership and board will need to undertake a comprehensive review of its operations and make significant changes to restore trust and confidence among its clients and stakeholders. The challenge will be significant, but with a commitment to transparency, accountability, and a renewed focus on ethical and responsible practices, Credit Suisse can potentially regain its standing as a trusted and reliable financial institution.
What caused the recent drop in share prices?
The recent drop in share prices was prompted by several events. Initially, CEO Ulrich Koerner made extensive efforts to regain the trust of anxious clients and encourage them to reinvest. These efforts were successful, resulting in a reported increase in deposits in January. However, on March 9, the annual report of the bank was delayed due to an inquiry from the US Securities and Exchange Commission. This delay caused concern among investors. Additionally, the failure of Silicon Valley Bank, a regional lender in the US, due in part to risky investments and increasing global interest rates that reduced the value of its bond holdings, contributed to investor panic and led to a sell-off of stocks associated with banking risk and deposit outflows.
How severe was the situation?
On March 15, Credit Suisse experienced another drop in its stock value following the announcement from Saudi National Bank, its largest shareholder, that it would not be investing any further in the company. As a result, Credit Suisse requested a public statement of support from the Swiss central bank. The cost of insuring the bank’s bonds against default for one year rose sharply, reaching levels not seen since the 2008 financial crisis for major international banks. As other banks tried to protect themselves against counterparty risk for transactions with Credit Suisse, the quoted prices for a one-year credit default swap skyrocketed from 836 basis points (indicating a 10% probability of default) on March 14 to over 3,000 basis points. However, there were few actual trades executed due to the lack of liquidity in the market. In addition, Credit Suisse’s additional tier 1 bonds, which are subordinate to all other ranks of debt and may be written down if capital falls below a predetermined level, were trading below 80% of their face value, indicating significant distress. Even bonds due in April were trading at prices significantly below face value.
Aftermath
According to a report by Bloomberg News, Credit Suisse has been in discussions with Swiss authorities about ways to stabilize the bank. The first action taken was a statement issued late on March 15 by Switzerland’s central bank and financial regulator, which stated that the bank would receive a liquidity backstop if necessary. The regulator also confirmed that Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks. On March 16, Credit Suisse announced that it had arranged to borrow up to 50 billion francs from the Swiss National Bank and was offering to buy back up to three billion francs of dollar- and euro-denominated debt. Other options being discussed include a possible separation of the bank’s Swiss unit and a potential merger with larger Swiss rival UBS Group AG, although it remains uncertain whether these steps will be taken. The Swiss government has also raised the possibility of acquiring a stake in Credit Suisse as part of a capital increase if needed.
The CEO of Credit Suisse has proposed a three-year recovery plan which includes cutting 9,000 jobs, dismantling the investment banking division that was built up over five decades, and returning the bank to its roots as a wealth manager for ultra-high net worth clients. This entails spinning off its American investment bank, First Boston, which was acquired in 1990, with the aim of listing it by 2025, and selling parts of its securitized products unit to Apollo Global Management Inc. However, this plan may be hindered by the recent financial sector sell-off triggered by the collapse of Silicon Valley Bank and two other US banks.
