Credit Suisse board knew about cumulative risk weaknesses

The multibillion dollar losses suffered by Credit Suisse following the collapse of Greensill Capital and Archegos Capital may well rank among the most significant risk and compliance failures of the past decade. It is on a par with Goldman Sachs’ 1MDB fundraising, HSBC’s money laundering scandal and Wells Fargo’s account fraud failures.

A number of high-profile executives left the Swiss bank in April, and the role played by the bank’s board and risk committee, and also by its financial regulator, the Swiss Financial Market Supervisory Authority (FINMA), are now under the spotlight.

Credit Suisse has long been known as a conservative Swiss bank with a reputation for caution. The bank, which had rarely put a foot wrong since its foundation in 1856, has latterly strayed into a pattern of reckless risk management and commercial misjudgements. Senior individuals appear to have missed red flags in terms of both risk and the value of commercial businesses, leading the bank to place too strong a focus on a little-known start-up — Greensill — and a hedge fund — Archegos — that was well-known to be heavily leveraged.

A prudent institution should strive to ensure it has skilled individuals, committees and technology in place to identify, measure, monitor, manage and report on risk and compliance. Since the 2008 financial crisis, risk and compliance functions have come to play pivotal roles within financial institutions, to ensure proper oversight and alert senior leadership to any problems that may emerge. The board, risk committee and regulators must all play their part in ensuring that an appropriate risk framework is in place.

Approach of risk

Credit Suisse’s risk culture appears to have changed significantly following the appointment of Lara Warner as chief risk and compliance officer; she was appointed as the bank’s chief compliance and regulatory affairs officer in 2015 and became head of the global risk and compliance division in 2018. Warner had previously been an equity analyst at Lehman Brothers.

With the imprimatur of the board, Warner pushed for risk and compliance to be more commercially focused and reorganised risk oversight to align it more closely with business operations.

The reorganisation saw the departure of more than 20 of Credit Suisse’s most experienced risk managers, while some hitherto independent risk functions were directed to report to the head office of the technology department.

– Niall Coburn, Senior Regulatory Intelligence Expert, Thomson Reuters

Some of the staff members who remained after the reorganisation may perhaps have been wary about raising concerns. It is unclear what role Credit Suisse’s technology risk tools and systems played in monitoring Greensill and Archegos, but they either remained unused or were ineffective.

Red flags

As the 2008 financial crisis showed, major losses tend not to happen overnight. By 2019/2020, Credit Suisse was already exposed to significant compliance and risk difficulties. The board, the risk committee, the chief risk and compliance officer and even regulators should have questioned what was happening and asked themselves why risks were escalating.

By March 2019, for example, Credit Suisse had already lost $60 million on Canada Goose, a clothing company, and another $200 million on Malachite Capital, a New York hedge fund. It is unclear what emerged from internal investigations into these losses, which appear to have be accepted by the bank with little fanfare. Nor did they prompt a change in direction on the part of the bank’s risk committee, headed by Andreas Gottschling.

By June 2020, following alleged frauds at Chinese coffee chain Luckin, Credit Suisse had lost more than $500 million in margin loans. Luckin’s failure revealed concerns about its company accounts and sales records, and there were allegations of internal accounting fraud. Events at Luckin led U.S. regulators to consider the extent to which capital markets should be made accessible to firms from China.

In September 2020, Credit Suisse faced further losses of up to $680 million following its involvement in advising Japan’s Softbank Group on a $1 billion convertible bonds deal from Wirecard AG. The bank re-packaged the bonds and resold them to third-party investors. Wirecard went into liquidation in November 2020 when its auditor indicated that it was unable to account for more than $2 billion in deposits and there were found to be significant issues with Wirecard’s financial statements. These matters are being investigated by German regulators and prosecutors.

Risk culture

There appears to have been a failure within the bank to assess risks. Both Warner and Gottschling overruled the risk assessors and approved the $160 million loan to Greensill, even though the bank’s risk experts in Asia had expressed serious reservations about the loan and about the bank’s escalating exposure.

Here too, red flags were ignored. A recent report from Greensill’s liquidators has revealed that its Australian parent had failed to file tax returns for the years ending December 2017, 2018, 2019 and 2020, and that it had sought extensions indicating complex financial arrangements. Credit Suisse could not, therefore, have had the full financial picture when evaluating its potential involvement with Greensill. It is hard to believe any bank would lend money to an individual or a small business if its tax returns even for one year were unavailable, yet Credit Suisse became involved with Greensill without being able to review returns for four consecutive years. This would appear to be yet another example of a risk culture at Credit Suisse, which put profit before an appropriate consideration of risk.

The board and regulator

Credit Suisse’s board and its risk committee, as well as its regulator, FINMA, have kept low profiles in relation to the spiralling losses. Credit Suisse’s board and the risk committee appear to have been “missing in action”, and allowed the bank to become over-exposed. The board and the risk committee must now explain to investors and shareholders the reasons behind the $1.6 billion exposure to Greensill, as well as a further $4 billion exposure to Greensill-linked funds and the $4.7 billion loss relating to Archegos Capital.

FINMA should also be asking itself whether its supervision of the bank was adequate.

Niall Coburn is senior regulatory intelligence expert, Asia Pacific. He joined Thomson Reuters in 2013 from FTI Consulting where he was managing director for investigations in Australia. A barrister, he is a former senior specialist adviser to the Australian Securities and Investments Commission and director of enforcement at the Dubai Financial Services Authority. He was part of an international team that wrote the regulatory and financial market laws and rules for the Dubai International Financial Centre. He has more than 20 years’ experience in financial markets regulation. In 2002, he was awarded an ASIC Australia Day Honour Medal for his work in corporate investigations. He has written a book on corporate investigations and insolvent trading and has been a regular commentator for the Australian Financial Review. Niall is a Barrister of the High Court of Australia and holds a Bachelor of Arts in Economics and law degrees from University of Tasmania, a master’s degree in law from Melbourne University and a Diploma of Business Administration from Mt Eliza Business School. He also appears regularly as a commentator for ABC television in relation to financial investigations and corporate collapses and is a commentator in the Australian Financial Review.

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