The crisis at Credit Suisse, until recently Switzerland's second-largest bank, came to a head when it was announced that it was to be taken over by UBS, the country's leading bank.
With more than 167 years of history, what led Credit Suisse to liquidity problems that led to the collapse of its shares, the loss of confidence of its clients and investors, and subsequently to the takeover agreement (sponsored by Swiss regulators) by UBS?
Behind the fall of this bank, one of the 30 largest in the world, there is a series of events - and scandals - that have a lot to do with inadequate and inefficient risk management and lack of internal control.
In this article, we tell you more about the recent case of Credit Suisse, which in less than a week joined the collapse of Silicon Valley Bank. Both cases, although very different, have generated uncertainty in the global financial sector and negatively impacted the confidence of clients and investors.
What happened to Credit Suisse?
The viability and continuity of Credit Suisse were significantly threatened after the collapse of its shares last Wednesday, March 15 (more than 20%), partly generated by the panic experienced in the financial sector due to the bankruptcy of Silicon Valley Bank and Signature Bank at the beginning of the month.
In addition to this situation, the bank was experiencing high customer deposit withdrawals and major financial problems, which initially led it to ask the Swiss National Bank (SNB) for a loan of 50 billion Swiss francs (around 50.75 billion euros) to improve its liquidity.
However, this was not enough. Therefore, Swiss regulators intervened for UBS to acquire Credit Suisse: an emergency rescue agreement was put in place by Credit Switzerland.
UBS will pay 3 billion Swiss francs for Credit Suisse, equivalent to US $3.25 billion and representing 60% less than the bank was worth at the close of the market on Friday, March 17. Swiss President Alain Berset said this acquisition was the best decision to restore lost confidence in the financial market.
Causes of the Swiss bank's financial problems
Beyond the current context of the financial sector, Credit Suisse's crisis has been going on for some years, since it has been involved in different cases that have affected its finances, reputation, and trust among clients and investors. Some of these cases are related to financial mismanagement, espionage, corruption, and money laundering.
In 2021, for example, the bank lost US $5.5 billion after the family investment fund Archegos Capital Management went bankrupt. In addition to this fund, Credit Suisse was also affected by the collapse of the financial services firm Greensill.
Corruption scandals, such as the Mozambique case involving state loans, and money laundering to a Bulgarian criminal organization and for which it was sentenced to pay 2 million Swiss francs in June 2022, also hurt the bank.
And as if that were not enough, Alex Lehmann, its chairman, was recently investigated by the Swiss Financial Market Supervisory Authority, Finma, for the public statements he made about the bank's financial situation, since in reality, it was not achieving a return of liquidity but, on the contrary, capital withdrawals continued to occur. Proof of this is that in the last quarter of 2022, the bank suffered outflows of funds of over 110 billion Swiss francs.
Risk management at Credit Suisse
The above and other facts, most scandalous, fueled the crisis of this Swiss bank, but the background of all this, no doubt, is the lack of adequate and efficient management of its financial (market, liquidity) and non-financial (operational, compliance, reputational) risks and internal control.
In fact, in its 2022 annual report, published on March 14, Credit Suisse acknowledged a weakness in the internal control of its financial reporting. According to auditor PwC, the bank "failed to design and maintain an effective risk assessment process to identify and analyze the danger of material misstatements."
All this contributed to the bank's crisis and subsequent downfall. The lesson from this case of one of Switzerland's most important and globally recognized financial institutions is the need to have an adequate and robust risk management system in all organizations, regardless of sector or size, and to give this management and internal control the value it deserves.
In conclusion, controls and supervision are fundamental for the continuity and sustainability of businesses over time and Credit Suisse is a clear example of this for not having implemented them correctly.
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