ABOUT
With its headquarters in Switzerland, Credit Suisse Group AG is a multinational investment bank and financial services provider. With offices in all the major financial centers around the world, it is one of the nine global bulge bracket banks and offers investment banking, private banking, and asset management. Credit Suisse was founded in 1856 as a means to expand Switzerland’s rail network. The corporation, one of the least damaged banks during the financial crisis, began slashing costs and laying off workers afterward. In 2008 and 2012, multiple worldwide investigations into the bank’s tax evasion led to a guilty plea and a loss of US$2.6 billion in fines.
Advisory services are provided, as well as customized investments and financing solutions, to wealthy private clients throughout Europe, the Middle East, Africa, and Latin America through the International Wealth Management business. Asia Pacific segment includes activities related to wealth management, lending, and underwriting. Global Markets offers prime brokerage, securities sales, trading, execution, and comprehensive investment research services. The company was founded in Zurich, Switzerland, in 1856 by Alfred Escher.
WHY CREDIT SUISSE IS IN THE HEADLINES?
Credit Suisse has been engulfed in a crisis for the past few months. Since it is a significant bank, coming under the bulge bracket bank criteria, the failure of such a colossal size bank may have an impact on the entire world, in the same way, that Lehman Brothers, another American bank, failed in 2008 had lighted a spark causing the Great Recession. During the past year, the stock’s steep decline has resulted in a more than 50% decrease in market capitalization for Credit Suisse. As a result of a string of scandals that began in 2021 which is enunciated below, these adverse results have been witnessed by the global economy.
During the pandemic, the stock price of Credit Suisse was $12.30, but it is now $4.42, as of October 11, 2022. This has resulted in a more than 50% decline in its market capitalization. Because of Credit Suisse’s declining value and scandals, concerns have been raised over its stability. Recent social media rumors claim the bank is close to failure, but Credit Suisse denies this, saying it has a solid capital base and liquidity which can only be predicted through the days to come. Credit default swap rates on Credit Suisse debt have increased dramatically this year, from less than 1% to around 6%. These inflated rates show exhibit that the market believes and dreads that bankruptcy is to be more probable.
SLUMP OF ARCHEGOS CAPITAL MANAGEMENT
The collapse of Archegos Capital Management had a major share in putting risk and causing aversions to the Credit Suisse risk management policies. Viacom CBS’ share price plunged in March as a result of a stock transaction, causing one of the most shocking financial crashes in history. The client in question was the $10 billion family firm Archegos Capital Management, founded by well-known New York financier Bill Hwang, who ultimately lost the most money. To raise money so Archegos could pay its debts, some banks sold off the fund’s positions once Archegos failed to meet the margin calls. As a result, fire stock sales accounted for $20 billion.
Credit Suisse and Nomura both announced on Monday 29 March 2022 that the event had negatively impacted their prime brokerage businesses. A staggering $5.5 billion loss was reported by Credit Suisse following the Archegos disaster, by far the largest loss among prime brokers. The Archegos fallout happened subsequently after when Greensill Capital, a partner in supply chain funds, went bankrupt in November, Credit Suisse was left reeling and was compelled to raise $1.9 billion in capital from investors to balance its balance sheet.
GREENSILL CAPITAL SCANDAL
The spectacularly quick failure of Greensill ranks alongside SoftBank and Credit Suisse as one of the most spectacular failures of a major global financial institution over the past ten years. Throughout it, all, Lex Greensill, an Australian farmer turned banker, stands at the center of the action. When he founded his London-based company in 2011, he was responding to a dilemma that existed at the time. Businesses were reluctant to pay for their supplies until they were ready to use them, while businesses making a supply needed payment at the earliest thus indulging in supply chain finance.
In February 2018, Abengoa, a Spanish renewable energy firm, filed for insolvency, and Carillion, a British construction giant, failed as a result of the issue. Despite it being saddled with billions of euros in debt, Abengoa narrowly avoided going bankrupt in 2015 as a result of Greensill’s early client’s enormous debt load. The number of regulators, auditors, and rating agencies concerned about the incomplete disclosure of firm balance sheets had increased.
Although the U.S. Financial Accounting Standards Board announced in October that it would begin crafting stricter disclosure guidelines, a global accounting board chose not to follow suit two months later. Mr. Greensill’s debt funds attracted the attention of SoftBank the following year. In contrast, the Vision Fund invested in Greensill, another division of SoftBank invested hundreds of millions in Credit Suisse funds. Afraid that there would be no insurance to protect the Greensill funds, Credit Suisse froze the funds, which were worth $10 billion at the time. In Credit Suisse, the fallout from the bankruptcy filing has been felt widely. In addition to the $3 billion cash refund for investors, the fund is attempting to collect additional funds. Additionally, Greensill’s $140 million loan from it was expected to result in losses.
MONEY LAUNDERING ALLEGATIONS
Several transactions executed or approved by the former employee of Credit Suisse between July 2007 and December 2008 were found to constitute aggravated money laundering. This was true despite obvious signs that the money had unlawful origins. A $2 million fine was assessed against Credit Suisse for money laundering in connection with a Bulgarian cocaine network. It was found that the bank breached its fiduciary duty by not preventing the laundering of money by the criminal organization revealing feeble client management.
KREMLIN INVASION OF UKRAINE
The Swiss government imposed sanctions on Russia following its invasion of Ukraine. Accordingly, Credit Suisse requested that hedge funds and other investors delete records relating to Russian billionaires and their loans. As a result, investigations into whether the bank was complying with sanctions were conducted.
DATA BREACH
Credit Suisse had disclosed, through a massive information leak, the secret wealth of clients involved in torture, drug trafficking, money laundering, corruption, and other major crimes. It was revealed that more than $80 billion was kept in the vault of one of Switzerland’s most reputable financial institutions. The database contains information on 30,000 Credit Suisse clients worldwide. The leak indicates that Credit Suisse failed to test for illegal assets and questionable clients despite repeated commitments over decades which were divulged by the Süddeutsche Zeitung, a major German newspaper.
PERPLEXING ISSUE – DOES A CONCERN EXISTS ABOUT CREDIT SUISSE FALLOUT?
An indicator of the state of the market can be measured by the volatility of a stock price and the economy being globally interconnected, the major Investment Bank collapsing comes with an ingrained issue of Economic Depression during these tough times. The volatility of Credit Suisse’s stock price can reveal the level of market apprehension regarding the overall state of the economy at a time when inflation is rising and many people are worried about an impending recession.
Despite the guarantees, the current situation, which includes increased investor scrutiny of the bank’s finances, is the result of speculation and worries about the bank’s future. The weekend after Koerner, the bank’s CEO, released the statement of confidence, stock prices plunged on October 3. The bank’s stock has decreased by roughly 60%, only in 2022.
Koerner is likely to make considerable changes in the wealth and investment banking departments to lower costs at all levels. The firm proposed a “radical” turnaround plan, promising to transform it into “a stronger, more robust, and more efficient bank” later. The project would result in the loss of 9,000 full-time employees by the end of 2025 and another 2,700 positions soon after thus resulting in laying offs and affecting the economic crisis.
With the question of whether India should be concerned, Credit Suisse AG operates an Indian business. There are few Credit Suisse operations in India, and the country’s banking sector does not face any significant risk. In 1997, when the East Asian currency crisis was in full force, it reached India. Capital controls, however, helped India avoid the worst repercussions of the currency crisis. Yet, the Indian entity might be impacted by how Credit Suisse AG allocates its capital in the future.
Written by Aathira Pillai
Edited by Mehak Vora