Swiss National Bank’s Lifeline to Credit Suisse: Cop-out or Bailout?
We asked our quant fellow and ex-Credit Suisse strategist, Marco Santanché, to weigh in on the collapse of the bank. Below is his analysis.
Credit Suisse was a systemically important bank, so the Swiss National Bank’s decision last month to intervene with a CHF50 billion lifeline loan was sound. But why make a move only days before the troubled bank’s eventual fallout, when the crisis had been years in the making?
The decision seems to have been motivated by the frenzy of the situation, and the urgency to find a solution: the hope was that this loan would regain the trust of investors and clients. The SNB aimed to silently quiet the increasing, deafening talk of a bailout.
However, it’s likely to prove a myopic exercise, as the bank’s problems run much deeper than its financials. This has been a crisis of confidence, and it all began in 2021 with the Greensill saga and the collapse of Archegos. The SNB lacked the foresight then to demand risk management changes or issue clear statements to alleviate public concerns about the bank. Quite the contrary, in its 2021 annual report, the central bank merely stated that Credit Suisse’s financials were “robust” due to an increase in capital, but no action was taken, despite FINMA, the SEC-equivalent in Switzerland, having already launched an investigation into Credit Suisse. Capital is fine, regulations look ok, let's move on.
But Credit Suisse’s clients did move on: last year the bank saw its first net asset outflow – CHF123 billion – since the 2008 financial crisis as clients lost confidence and pulled their money out.
Was the SNB confident that Credit Suisse would use a lifeline loan for the better? Unlikely, given the bank’s track record over recent years. So the only plausible explanation is that the central bank believed this loan could send a strong signal to the market. It didn't.
Trying Swiss investment culture’s patience
Perhaps Swiss investment culture also plays a role here. According to research on behavioural finance (sponsored by none other than Credit Suisse), the Swiss rank near the top in terms of investor patience, ahead of every region in the study except Germany and Belgium. This might explain why the SNB has been standing on the sidelines for so long, perhaps waiting too long for Credit Suisse to turn things around.
The same study found that, despite a reputation for being conservative, Swiss investors are no more risk-averse than elsewhere when it comes to investing more money to avoid a definite loss, even if this could result in a greater loss (get-even-itis). Could this explain the eventual package that the SNB offered to UBS for its takeover of Credit Suisse?
Reputation: a bank’s ultimate asset
Reputation is perhaps more vital for banks than for other businesses, given their responsibility for safeguarding, managing and investing clients' money. And at the core of a bank’s reputation is how it manages its risk; the string of bank failures during the past few weeks is ample evidence of that.
The lesson from Credit Suisse is clear: the bank hasn’t been applying risk management properly. This is very similar to Silicon Valley Bank (SVB), but likely worse: while SVB might have had some technical misunderstanding of long-term bond and liquidity management, the crises of Archegos and Greensill demonstrated that if clients were important businesses, or paying well, Credit Suisse would fail to monitor risks properly.
These issues are particularly troubling: while most banking scandals can be attributed to fraudulent activities of individuals (such as the cases with Goldman Sachs and Deutsche Bank), in the case of Credit Suisse, its crises were instead systematic errors from a compliance or risk perspective. Credit Suisse believed what they were told (in the case of Greensill), and did not strictly require reports, documents or proof of the positions held (when it came to Archegos). There was probably nothing fraudulent about Credit Suisse’s action or inaction in these cases; the bank simply exercised no control, which means it did not do its job properly.
And this had an effect on the entire business: in its wealth management division, there was no such scandal, but still the blunders from the investment banking and asset management divisions led to losses on the wealth management side.
The rescue deal for Credit Suisse arrived earlier than one might have anticipated, and the economic environment surely proved to be an accelerating factor. But without proper risk management, the bank’s business will be doomed. It remains to be seen if UBS can fix the deep-seated problems of its new acquisition.