Credit Suisse take CHF 600 million hit from Archegos collapse
The Swiss Financial Market Supervisory Authority (FINMA) has begun enforcement proceedings against investment banking company Credit Suisse following the collapse of Archegos Capital Management. The Swiss regulator confirmed the proceedings during a statement today after the bank reported monumental losses in relation to the implosion of the Archegos hedge fund.
Having already been subject to overwhelming losses due to the downfall of Greensill Capital in March 2020, Credit Suisse has now reported that they will experience a CHF 600 million hit during Q2 as a result of Archegos.
FINMA are due to investigate the inadequacies within Credit Suisse’s risk management strategy and will appoint a third party to delve into the matters further. The Swiss regulator already opened a case concerning the Greensill scandal during March this year, with FINMA ordering the bank to hold additional capital against both occurrences.
Findings against both cases will be revealed publicly, though investigations typically take several months to complete.
What is the Archegos scandal?
Archegos was a capital management firm owned by New York-based investor Bill Hwang in 2013. In March 2021, Achegos fell into disarray when portfolio stocks encountered extreme price drops, which triggered margin loan calls from banks. Failure to meet the calls resulted in the likes of Credit Suisse liquidating their stock positions alongside others including Nomura, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley.
Bill Hwang was previously part of Tiger Management, owned by billionaire hedge fund manager Julian Robertson. In 2001, Mr Hwang went on to found Tiger Asia Management which became the biggest Asia-focused hedge funds during its peak. Tiger Asia Management pleaded guilty to insider trading during 2012, which resulted in a USD 44 million fine.
Archegos was a family run business office, a privately held company, meaning it was not directly regulated. As a result, it’s thought that the scandal could trigger regulatory changes for family offices which require them to report all holdings.
US Treasury Secretary Janet Yellen is in the process of observing all risks that hedge funds could inflict on the financial system, whilst the US Securities and Exchange Commission begin investigations into Bill Hwang.
What is the Greensill scandal?
Greensill Capital was a financial services company specialising in supply chain finance, founded in 2011 by Australian financier Lex Greensill, with the company filing for insolvency protection in March 2021.
Former UK Prime Minister David Cameron became involved in the scandal as he was in office when Greensill looked to become involved in UK government work. When Mr Cameron left office, he became an adviser for Greensill capital and contacted UK Chancellor Rishi Sunak requesting for Greensill to hold a significant allocation of government back loans.
Mr Cameron’s involvement with Greensill has led to concerns of lobbying, with questions as to why the UK government needed to use supply chain finance as well as apprehensions as to why Rishi Sunak pushed the treasury to arrange access to Covid Corporate Financial Facility (CCFF) loans.
In March, Greensill claimed to be under severe financial distress and could not repay a USD 140m loan called in by Credit Suisse, who was the company’s primary backer.
How have the scandals impacted Credit Suisse?
It has been a significant year for Credit Suisse thus far, which are still reeling from the effects of the Greensill saga, only to be immediately faced with the collapse of Archegos. Thomas Gottstein, the current Chief Executive Officer for Credit Suisse, is facing enormous pressure as it’s revealed that the bank has been financially impacted harder than all other competitors within the Archegos case.
The double scandal has swiftly annihilated a years’ worth of profit for the bank, as Mr Gottstein attempts to prove his ability to help rescue Credit Suisse during one of its worst years on record. The debacle has already seen Investment Banking Head Brian Chin and Chief Risk Officer Lara Warner step down, with the board vowing to abandon bonuses for the year and cut proposed dividends.
Credit Suisse announced today that without the Archegos scandal, the bank would have seen net revenue of CHF 7.4 billion, which would have been a 35% rise from the previous year. Mr Gottstein stated that Credit Suisse’s first quarter was on course for one of the strongest in 10 years, suggesting that the bank is ‘on the right track’.
Concerning the Archegos case, Mr Gottstein stated that “the loss was unacceptable and we had to take actions in terms of management changes. We are reducing our exposure in this business; we are reviewing our risk, controls and systems in that area.”
Despite the current difficulties the bank is facing, Mr Gottstein will not offer his resignation and firmly stated that Credit Suisse does not have a risk culture problem.
Will the Archegos scandal prompt a risk management revolution?
Whilst Credit Suisse indicates that the bank does not have issues when it comes to risk management, the recent double debacles have naturally caused the issue of risk management within financial services to come to the forefront.
Johann Scholtz, Equity Analyst at Morningstar European Banks, stated that there must be sufficient evidence that Credit Suisse has taken tangible steps to improve their risk management strategies during regulator investigations. Regulators must also review the impact on long-term revenue from reassessed risk appetite.
The back-to-back scandals have caused regulators to question whether Credit Suisse has a sufficient process for risk management. As a result, there will likely be stricter measures in place for investment firms going forward to allow for greater trading transparency.
The aim of risk management within financial services is to identify, assess, control and review various factors to mitigate potential impacts to the business. A solid risk management strategy incorporates the evaluation of uncertainties and how this could potentially influence a company. The decision to accept or reject risk should be based on clearly defined standards which the business has set itself.
When a business has a clearly defined risk management strategy, it should not experience many unforeseen experiences due to careful planning, organisation and budgeting.
On occasions where businesses do take a surprise hit, such as the scenario with Credit Suisse, companies should identify how to eliminate the risk, reduce the possibility of a repeat scenario or, in some cases, how to accept the risk.
Risk management is a vital component of any company, particularly within financial services where substantial sums of money are at stake. A substantial risk management strategy allows businesses to recognise and effectively handle potential risks, avoiding the possibility of overwhelming financial losses.
Financial audit, tax, and advisory services firm KPMG have highlighted that banks must be even sharper when it comes to risk management in 2021, given the continued uncertainty of COVID-19. In the era of the coronavirus pandemic, KPMG has advised that the risk strategies of all banks should be continually reviewed, with the effects of COVID-19 having such rapid and dynamic impacts.
The firm uses the acute rise in global unemployment as an example of the pandemic’s unpredictability, which led many banks to swiftly create ‘free style’ assessments of their credit portfolios.
Banks will also need to improve the quality of their data available to allow for rapid, real-time reporting for regulators. Significant amounts of data across banks are often held on incongruent databases, meaning data provided to boards and regulators are not always consistent.
It’s suggested that banks will need to heavily rely on the use of artificial intelligence (AI) to allow for more advanced data analytics. The use of AI would allow for more predictive modelling techniques to provide a comprehensive view of potential risk factors.
Banks must ensure that their IT systems are sufficient to handle increased levels of traffic as the periods of the coronavirus pandemic saw a rise in online customer transactions, with some systems unable to handle the volume. Equally, banks’ growing digital reliance calls for more robust cybersecurity setups to ensure customer data is protected.
When considering long term growth, banks with a solid risk management strategy are likely to acquire more business than those who do not deem risk management a priority. Companies with a strong awareness of potential risk factors are likely to preserve capital and liquidity for strategic moves.