The reason for the troubles at Credit Suisse is its failure in the core business of every bank: managing risks.
(Photo: REUTERS)
A systemically important bank that writes billions in losses. Customers who run away with their assets. A recovery plan that promises less investment banking and more stable businesses. A share price and ratings plummeting. No, we’re not talking about Deutsche Bank in 2016, when it slipped into a deep crisis after being threatened with fines worth billions from the USA. We’re talking about Credit Suisse here and now. A comparison with the German market leader at the time shows how precarious the situation of the major Swiss bank is.
In fact, some parallels between the two financial institutions suggest themselves: Similar to Deutsche Bank at the time, scandals are increasingly damaging the bank’s business. The downgraded ratings and high risk premiums for credit derivatives are bad for investment banking and wealth management, both important business areas for the major Swiss bank. And Credit Suisse’s risk premiums are now many times higher than those of its competitors.
In derivatives trading, many customers use internal guidelines to link their business volume to their bank’s ratings and risk premiums. In wealth management, this connection is often not so formally defined, but it is clearly measurable. At Deutsche Bank, customers withdrew a double-digit billion sum in response to the uncertainty.
The latest developments at Credit Suisse seem like déjà vu. Especially since the Swiss bank has so far only slowed down the outflow of money from its customers and not completely stopped it. The money house prefers to remain silent about the price it is willing to pay its customers for this. The surprisingly high outflow of customer funds from Credit Suisse is just one indication that it is even more difficult for the Swiss than for Deutsche Bank to change course in time. This is mainly due to three factors.
First, the cause of Credit Suisse’s woes is its failure in the core business of every bank – risk management. The Swiss fell for the supply chain financier Greensill and didn’t see the bankruptcy of the Archegos hedge fund coming. Credit Suisse therefore had to pay for customers doing business at the bank’s expense. The loss of confidence in the abilities of the major Swiss bank as a risk manager is likely to be more expensive than the financial damage.
At Deutsche Bank it was the other way around: too often it did business at the expense of customers. This non-financial misconduct was immoral and costly, resulting in hefty fines for the institution. However, it did not raise doubts that Deutsche Bank has its financial risks under control.
Investment banking: many questions are still open
Second: Credit Suisse does not have a turnkey solution for its investment banking. In contrast to Deutsche Bank, which scrapped its share trading in a clear cut, there are still many unanswered questions at Credit Suisse.
Under the name CS First Boston, a part of investment banking is to go public in 2024 or 2025. Whether the spin-off will succeed and at what price is completely unclear. The sale of the securitization business to the financial investor Apollo will not be completed until mid-year at the earliest.
Analysts also accuse the bank of insufficient transparency when it comes to which assets should end up where – at CS First Boston, at Apollo, at Credit Suisse itself, in the bad bank. This makes Credit Suisse a black box for clients, investors and its own employees – and is therefore bad for business.
Third, the boom years in investment banking are over. This is shown by the profit declines of many international institutes in this sector in the fourth quarter. The uncertain market prospects are also making asset management business more difficult, despite rising interest margins. The Swiss cannot therefore count on the tailwind from rising earnings.
More: High outflows at Credit-Suisse – “Investors were definitely disappointed”