International Finance
BankingFeatured

IF Insights: The heavy blows & eventual downfall of Credit Suisse

IFM_Credit Suisse
Credit Suisse was known for its CreditRisk+ model of risk assessment in loans

On March 20, 2023, came the dreaded news of Swiss banking giant UBS taking over its troubled rival Credit Suisse for a USD 3.25 billion buyout, a deal choreographed by the country’s banking regulators, amid the collapses of two American financial institutions, Silicon Valley Bank and Signature Bank.

The closure of the 167-year-old banking giant gave the flashback of the 2007-08 horror when Lehman Brothers (1857-2008) went bankrupt. Before the UBS takeover, Swiss authorities pushed for the realisation of a borrowing plan worth USD 54 billion to help the bank stay afloat. However, the investors and customers pulled out their money. Credit Suisse’s monetary outflows topped 10 billion Swiss francs after March 15, 2023, when the bank’s share price dropped by nearly 25% after Saudi National Bank, its largest investor, expressed its inability to provide any more financial assistance.

The declaration resulted in the market price of the bank’s unsecured bonds, set for maturity in 2027, dropping to a low of 33% of their par value on March 15, down from being valued at 90% at the month’s beginning. The situation deteriorated faster and resulted in the Swiss government jumping into the fray.

Why Is It So Important?

Credit Suisse is among the 30 financial institutions known as globally systemically important banks. It had its primary customer base mostly big companies and wealthy individuals.

Credit Suisse was known for its CreditRisk+ model of risk assessment in loans. Its insurance products are popular in the Swiss domestic market. Some 20–40% of its revenue has been from the bank’s private banking services, which have been among its higher profit-margin divisions.

Credit Suisse produced one of the six hedge funds following European stock indices. Apart from having a 30% ownership in hedge fund investment firm York Capital Management, whose products were being sold by the financial institution to its private banking clients. Credit Suisse is also used to manage the financial instruments of the Dow Jones Credit Suisse long/short equity index.

The Zurich-headquartered company was one of the nine global “bulge bracket” banks providing services in investment banking, private banking, asset management, and shared services.

The Bank Was Least Affected During 2007-08 Crisis

Credit Suisse, which had high-profile financial backers like Saudi National Bank, Qatar Investment Authority and Harris Associates, was formed in 1856 to fund Switzerland’s rail system. It also lent money for the country’s electrical grid and the European rail system. It made its transition into a retail banking entity during the 1900s, followed by a partnership with New York-based First Boston in the late 1970s. It acquired blue chip London stockbrokers Buckmaster & Moore In 1987, Bank Leu (oldest Swiss Bank ever) in 1990, Swiss Volksbank in 1993, Winterthur Group in 1997, asset management division of Warburg, Pincus & Co. in 1999 and Donaldson, Lufkin & Jenrette in 2000.

The Wall Street Journal in 2008 reported, “Credit Suisse survived the credit crisis better than many competitors.” Back then, it had USD 902 million in write-downs for subprime holdings and the same amount for leveraged loans. However, it didn’t face the need to borrow from the government level.

However, Its Record Was Always Under The Scanner

Despite being among Fortune Magazine’s ‘Most Admired Companies’, Credit Suisse reportedly offered criminals, corrupt politicians and controversial secret service chiefs a safe haven for their assets.

In 1999, it faced heat from Japan’s Financial Supervisory Agency for “window dressing” (a practice of selling derivatives that are often used by bank clients to hide losses).

In 2006, Credit Suisse acknowledged misconduct on its part in helping Iran and other countries hide transactions from US authorities.

In 2007, two Credit Suisse traders pleaded guilty to mismarking their securities positions to overvalue them by USD 3 billion, avoid losses, and increase their year-end bonuses.

In 2009, Yellowstone Club founder Tim Blixseth sued Credit Suisse as the latter attempted to collect USD 286 million in loan debt during Yellowstone’s bankruptcy proceedings.

In the same year, the US Department of Justice reached a USD 536 million settlement with Credit Suisse over accusations that the bank assisted residents of the International Emergency Economic Powers Act sanctioned countries to wire money illegally from 1995 to 2006.

Forex Manipulation in Europe in 2013, Tax Fraud Conspiracy in the United States in 2014, the 2015 Malaysia Development Berhad Scandal, the 2017 Mozambique Secret Loans Scandal, and Violation of US Foreign Corrupt Practices Act rocked the company’s image.

In 2018, tennis legend Roger Federer was urged by climate activists to break his sponsorship ties with Credit Suisse due to the company sharply increasing its financing for coal businesses during the 2016-2017 period.

In 2019, Pierre-Olivier Bouée, the then Credit Suisse chief operating officer was accused of snooping on another senior executive.

The bank also faced regulatory actions in Switzerland in 2022 for allowing a Bulgarian cocaine trafficking gang to launder cash between 2004 and 2008. In the same year, details of 30,000 Credit Suisse customers were leaked to a German media outlet.

After the Ukraine war broke out, Credit Suisse asked hedge funds and other investors to destroy documents linking Russian oligarchs. The US House Oversight Committee immediately launched a probe into the firm.

And Yes, The Doom Was Predicted

In October 2022, ‘rumours’ on social media projected the demise of the scandal-hit bank, thereby putting pressure on its stocks. The Swiss National Bank started following the situation closely, amid Credit Suisse suffering massive losses in 2021 from the Archegos and Greensill financial scandals.

Credit Suisse offered to buy back USD 3 billion worth of debt, and put Zurich’s Savoy Hotel on sale, apart from assuring its investors that the bank was stable, even though its wealthy clients were moving their assets out of the bank. There were ‘talks’ about a fresh infusion of USD 500 million from Saudi Crown Prince Mohammed bin Salman, but now the bank is history and taken over by its rival UBS.

Conclusion

Credit Suisse was known for its ability to understand the market pulse and restructure its operations as per that. Euromoney’s Global Private Banking Survey recognised the entity as the world’s best private bank in 2012. In the same year, Global Investors branded Credit Suisse as ‘The Best European Equity Manager’.

Credit Suisse also bagged several other prestigious awards, which testified to its ability to stay ahead of its competitors, through its operational proactiveness. However, its never-ending tryst with scams became its ultimate bane.

What's New

IF Insight: Navigating the ever-changing landscape of global crypto regulations

IFM Correspondent

If oil stabilises below USD 70, what will it mean for Gulf markets?

IFM Correspondent

Effective communication key to success, says Assupol CMO Velmah Nzembela

IFM Correspondent

Leave a Comment

* By using this form you agree with the storage and handling of your data by this website.