Saturday, March 2, 2024

What happened at Credit Suisse and how did it reach crisis point?

In spite of its big history, Credit Suisse was cursed with a series of scandals, management shifts, and significant losses in recent years.

Around mid-March 2023, Swiss bank UBS Group AG (UBS) bought rival Credit Suisse Group AG for 3 billion CHF (about $3.3 billion USD), a move planned to shore up the global banking system and avoid the latter financial institution from collapsing.

One of Switzerland’s leading financial institutions, Credit Suisse, since its predecessor Schweizerische Kreditanstalt was founded in 1856, was among a group of 30 banks known as globally systematically important, and a full collapse might have ruined the global financial system. 

What is Credit Suisse?

It all began with Swiss railroads in 1856. When the nation needed to finance the expansion of its rail network, the forerunner to Credit Suisse was founded. It has turned into an integrated bank operating in more than 50 countries around the world.

As of the end of 2021, Credit Suisse had assets under management (AUM) of 1.6 trillion CHF (about $1.75 trillion), making it the second-largest bank in Switzerland after UBS. At that time, Credit Suisse had hired employees over 50,000 people. Also, as of year-end 2022, Credit Suisse’s AUM had dropped to about 1.3 trillion CHF (about $1.4 trillion).

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In 2023, Credit Suisse was organized into five divisions: Wealth Management, Swiss Bank, Asset Management, Investment Bank, and Capital Release Unit. At the time of its purchase by UBS, Credit Suisse had about 150 offices in roughly 50 countries around the world.

What Caused the Collapse of Credit Suisse?

In spite of its big history, Credit Suisse was cursed with a series of scandals, management shifts, and significant losses in recent years.

In February 2020, Credit Suisse’s then-CEO Tidjane Thiam signed their resignation after a 2019 spying scandal. Credit Suisse’s wealth management boss Iqbal Khan left for UBS and was subsequently bugged by private contractors in an effort to determine whether he poached clients. In 2021, during the pandemic, the collapse of the U.S. family investment fund Archegos Capital and British finance firm Greensill Capital activated a pre-tax loss of close to $1 billion for Credit Suisse. Backing the collapse of Archegos, Credit Suisse’s investment bank CEO and chief risk and compliance officer left the company.

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An independent investigation of Credit Suisse’s role in the Archegos scandal found that the bank failed to “effectively manage risk,” but evinced that no fraudulent or illegal conduct occurred.

After a few months, around mid-January 2022, the chairman Antonio Horta-Osorio also resigned from the bank’s board after about nine months in the position over a scam related to his breaching of Swiss and British COVID-19 quarantine protocols.

By late summer 2022, new CEO Ulrich Koerner unveiled a strategic review that was hindered by an unsubstantiated rumour that Credit Suisse was facing an impending failure. This prompted clients to pull 110 billion CHF (about $119 billion) of funds in the final quarter of 2022.

Facing a stock that shed about three-quarters, in early 2023 Credit Suisse announced plans to borrow up to $54 billion to shore up liquidity and boost investor confidence. However, by mid-March, the bank’s top backer, Saudi National bank, said it would not give more money to Credit Suisse as a result of regulatory barriers.

One of the final developments prior to UBS’ purchase of Credit Suisse was the collapse of U.S. banks Silicon Valley Bank and Signature Bank in early March 2023, prompting the U.S. government to make sweeping promises to depositors that money would be available but nevertheless sending fear throughout the global banking system.

Timeline of the Collapse

In summary, the key events leading up to the collapse of Credit Suisse include:

  • 2019 and early 2020: Credit Suisse faces a spying scandal regarding an outgoing wealth management executive; then-CEO Tidjane Thiam resigns.
  • 2021: Archegos Capital and Greensill Capital collapse, leading to $1 billion in losses for Credit Suisse and another management shake-up.
  • January 2022: Chairman Antonio Horta-Osorio resigns from the company following news that he broke COVID-19 quarantine regulations.
  • July and August 2022: Rumor circulates that Credit Suisse faces impending failure, prompting clients to pull about $119 billion in funds in the last quarter of the year.
  • January 2023: Credit Suisse says it will borrow up to $54 billion to shore up liquidity, but top backer Saudi National Bank says it will not give money because of regulatory issues.
  • March 2023: U.S. institutions Silicon Valley Bank and Signature Bank fail, setting the global financial system on edge.
  • March 2023: Switzerland’s executive branch votes to allow the takeover without shareholder approval.15

Impact of the Collapse

The footprints of UBS’ takeover of Credit Suisse are wide-ranging. For the bank’s offices around the world and its 50,000 employees, the future remains uncertain, as UBS could soak up some or all of them and shutter or lay off others. UBS is expected to have roughly $5 trillion in AUM following the deal.

The global financial system acknowledged measures to attempt to sustain banks. Central banks moved to coordinate daily access to a lending facility for banks seeking to borrow U.S. dollars in the immediate backwash of the takeover. Switzerland’s government is peculiarly impacted, as it has agreed to provide 100 billion CHF ($108.4 billion) to secure the deal is concluded. For investors, about 16 billion CHF (over $17 billion) in Credit Suisse’s contingent convertible bonds are wiped out as part of the takeover.

The collapse of Credit Suisse might also impact Switzerland’s image as a stable and strong country for banking. The loss of one of the country’s oldest financial institutions, the bank that bankrolled the construction of Switzerland’s railways, could leave Swiss citizens in and out of the banking industry ruined for a long time.

Possession of Credit Suisse by UBS

UBS’ purchase of Credit Suisse was mobilized and accepted by regulators, the over $3 billion price tag for the deal is a best price compared with the size of the bank and its assets. UBS officials also said immediately following news of the purchase that they initiated to reduce the size of Credit Suisse in the coming years, mainly by selling off parts of the bank, although details remain scanty.

Various related terms might be used to describe situations like Credit Suisse’s, including bailout, merger, and takeover, but there are a few distinctions. A bailout is when an individual, business, or organization provides capital or other resources to a failing company to prevent it from collapsing. A merger is a type of agreement that unites two companies into one, often with one company that is struggling subsumed by the other. And a takeover is when a company successfully bids to take over another, gaining control of its assets. Officially, the UBS/Credit Suisse deal is a merger.

What Will Happen to Credit Suisse Stock?

Credit Suisse shareholders, as per the agreement, will receive one UBS share for every 22.48 Credit Suisse shares held. Credit Suisse stock will be blacklisted by the time the deal is completed, likely by the end of 2023.

How Is the Collapse of Credit Suisse Related to the Silicon Valley Bank Collapse?

The specifics of the collapses of Credit Suisse and Silicon Valley Bank are different. However, the collapse of Silicon Valley Bank and Signature Bank in close succession in the U.S. did frighten regulators and investors worldwide and led to U.S. government measures to stabilize the global financial system.

Following several years of scandals, in March 2023 Switzerland’s Credit Suisse bank collapsed. It was purchased by Swiss rival UBS for about $3.25 billion in a deal approved by Swiss regulators without shareholder approval. UBS plans to sell off and downsize parts of Credit Suisse in the process. Following the completion of the merger, Switzerland will have only one major financial institution, and the country’s reputation for banking stability may have been shaken.

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