‘Swimming naked’: Credit Suisse is not the only financial giant facing trouble
The atmosphere of crisis that surrounded Credit Suisse is recent weeks appears to have abated but the strategic challenges that led to the speculation of a near-death experience and a collapse in its share price remain.
While the extent of the venerable Swiss bank’s woes was massively overhyped by the Twitterrati – the bank is a global systemically important institution with the rigorous capital and liquidity requirements and supervision that designation entails – the reasons for its share price only reflecting about a quarter of the book value of its shareholders’ funds lie are depressingly familiar.
Credit Suisse is too big to fail, but it should have known better.Credit:Bloomberg
They are depressing because we – and Credit Suisse – have seen them before.
Indeed, Credit Suisse saw them close up when its fellow Swiss banking giant, UBS, had to be bailed out by the Swiss National Bank after the 2008 financial crisis. They have also been a significant factor in Deutsche Bank’s decade-long struggle for stability.
At their core has been several decades of ambition and effort by the biggest of the European banks to challenge the Wall Street banks’ dominance of global investment banking. Those efforts have been studded by destabilising losses, massive fines and failure to achieve those ambitions.
When UBS self-diagnosed the reasons for its near-failure after the global financial crisis, its explanation went to the heart of the challenges, and vulnerabilities, of the European banks trying to push their way onto the Wall Street banks’ turf and create the hybrid “universal banks” that, like a JP Morgan Chase, were seen as the new global model.
From the mid-1990s the Europeans tried to buy and grow their way into investment banking markets, deploying the revenue and relatively cheap capital generated by their low-risk traditional banking operations in Europe to chase higher-risk investment banking assets and revenues.
For UBS in the pre-2008 era, that meant using its cheap funding to acquire revenue and big markets shares in sub-prime lending and securities trading. That didn’t end well and UBS redefined its investment banking ambitions much closer to its core and with a better appreciation of the need to price the higher risks.
Deutsche, after two decades of trying to muscle in on the Wall Street banks’ territory – and growing its investment banking activities to the point where the International Monetary Fund dubbed it the riskiest global systemically important bank in the world – has spent recent years continually restructuring after surrendering most of its original ambitions.
Credit Suisse, however, was still operating at the outer edges of the risk spectrum until the implosion of Archegos Capital, which cost it $US5.1 billion ($8 billion), and the Greensill collapse, in which Credit Suisse clients lost billions, exposed the kinds of risks it had been taking – and the poor management of those risks.
European banks have for decades tried to push their way onto the Wall Street banks’ turf and create the hybrid “universal banks” that were the new global model.Credit:Bloomberg
In the aftermath of the Archegos debacle (which also claimed other banks, although most of the Wall Streeters got out early and limited their losses), it emerged that Credit Suisse had streamlined and reoriented its risk-management function to be more “commercial.”
That’s an echo of what UBS was doing in the lead-up to the financial crisis, when it was chasing investment banking market share without proper regard to the risks it was taking or how it was managing or pricing those risks.
With a new chief executive appointed in July and an overhauled senior management group (including its risk management team) Credit Suisse has drawn up a new strategy, to be unveiled on October 27.
It is inevitable that it will back out of some of the riskier activities it has been engaged in and, in pursuit of a stronger and less risky balance sheet, even some of its more profitable investment banking operations.
Rates are rising rapidly and liquidity in financial markets is shrinking. As that tide of cheap liquidity goes out, to borrow from one of Warren Buffett’s more colourful and popular lines, Credit Suisse won’t be the only big institution found to have been “swimming naked”.
It’s already started that effort, with a process to sell its securitised products group nearing completion. That business represents about $US20 billion of the bank’s risk-weighted assets of about $US280 billion but an estimated $US75 billion of its credit exposures. Exiting it would release an estimated $US2 billion of capital.
It’s also seeking sales or the joint venturing of other investment banking businesses. Indeed, Bloomberg has reported that it is contemplating bringing an investor into the entire, albeit smaller, investment bank.
The scale of its challenges do need to be seen in context. Most external analyses say that the bank needs an equity infusion of between about $US4 billion and $US6 billion. That’s a relatively modest amount, albeit that Credit Suisse will be reluctant to raise new capital when its share price, despite bouncing back 24 per cent from last week’s lows, is still about 60 per cent below its January peak.
The hysterical social media commentary last week overlooked the reality that, given its designation as a global systemically important bank, it wouldn’t be allowed to fail. The Swiss central bank, which has form with its UBS bailout, would inevitably intervene.
The obvious strategy for Credit Suisse is to retreat, not necessarily entirely, to its core as a conservative bank with a more conventional wealth management business.
After two decades of trying to muscle in on the Wall Street banks’ territory, Deutsche Bank has spent recent years continually restructuring after surrendering most of its original ambitions.Credit:AP
While it has lost the one advantage the Swiss banks used to have over their US counterparts operating in global markets, its ability to offer clients absolute privacy, its banking and wealth management operations remain large and sophisticated businesses.
Credit Suisse isn’t alone. After more than a decade of post-crisis ultra-low to negative interest rates and torrents of central bank created liquidity, there were massive incentives for financial institutions and individuals to chase increasing risk and some of those risks will now be exposed by the speed and extent at which the key central banks, most notably the US Federal Reserve Board, are reversing their policies.
Rates are rising rapidly and liquidity in financial markets is shrinking. As that tide of cheap liquidity goes out, to borrow from one of Warren Buffett’s more colourful and popular lines, Credit Suisse won’t be the only big institution found to have been “swimming naked”.
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