Losses, mismanagement, failed strategies; how Credit Suisse reached crisis point
The crisis in Credit Suisse had been brewing since 2021, but the Swiss lender rattled investors on Tuesday by revealing that it had discovered "material weaknesses" in its 2021 and 2022 financial reports. On Wednesday, its stocks tumbled to an all-time low, stoking concerns over the overall heath of the banking sector, especially after the collapse of two banks in the U.S.
"[Credit Suisse] Group's internal control over financial reporting was not effective as it did not design and maintain an effective risk assessment process to identify and analyze the risk of material misstatements in its financial statements," the bank said in its annual report, released Tuesday.
On Wednesday, the Swiss bank's shares plummeted to $1.88 per share, dipping 25% lower than the previous day's close after Credit Suisse's major shareholder, Saudi National Bank, announced that it would not raise its stake in the bank due to restrictions set by regulators from the various jurisdictions overseeing its investment, CBS News reported.
According to Reuters, the shares have lost 75% over the past one year.
Amid the turmoil, Credit Suisse announced on Thursday its plan to borrow as much as $54 billion from the Swiss central bank to bolster its liquidity, Reuters reported.
This move was prompted by concerns over a potential global banking crisis, as a decline in its shares and bonds had raised alarms. However, some analysts are skeptical that this amount will be sufficient to address the bank's liquidity issues.
How the crisis took shape?
The crisis in the 167-year-old Swiss lender is the result of a series of scandals spanning several years, changes in top management, huge financial losses, and a lacklustre strategy.
In early 2021, Credit Suisse faced a major crisis after it was revealed that the bank had incurred big losses following the collapse of Archegos Capital Management, a family office hedge fund.
Archegos had taken on large positions in several companies using derivatives, or financial instruments that derive their value from an underlying asset. When the value of these positions dropped sharply in March 2021, the banks that had lent money to Archegos, including Credit Suisse, were left with significant losses.
Credit Suisse's losses from the Archegos debacle were reportedly around $5.5 billion, which was a significant blow to the bank's balance sheet.
In addition, the bank also faced a separate crisis related to its involvement with Greensill Capital, a supply chain finance company that collapsed in March 2021.
Credit Suisse had invested in Greensill's funds and had provided loans to the company, and when Greensill filed for insolvency, Credit Suisse was left with significant losses.
In the second half of 2021, Credit Suisse faced another crisis when it was revealed that the bank had been involved in the collapse of a major investment fund called the Gupta Family Alliance (GFA). Credit Suisse had provided significant amounts of financing to GFA, which was owned by the Gupta family, a politically connected business group in South Africa. When GFA collapsed, Credit Suisse was left with significant losses.
Why Credit Suisse is important?
According to experts, the Swiss company, which has a much larger balance sheet than SVB, is categorized by financial regulators as a "global systemically important bank" and is deeply interconnected with financial entities, including subsidiaries in the U.S.
The Swiss company, which has a much larger balance sheet than SVB, is categorized by financial regulators as a "global systemically important bank" and is deeply interconnected with financial entities, including subsidiaries in the U.S.
According to Reuters, Credit Suisse is one of the world's biggest wealth management firms and is also considered a crucial entity among the 30 global systemically important banks. If it were to fail, the effects would be felt throughout the entire financial system.
The bank operates through various segments such as local Swiss banking, wealth management, investment banking, and asset management.
It employs just over 50,000 people and has 1.6 trillion Swiss francs worth of assets under management as of the end of 2021. With a presence in approximately 50 countries and over 150 offices, Credit Suisse caters to a significant number of wealthy individuals, entrepreneurs, and companies as a private bank.