Switzerland’s role as banker to the world’s rich is built on a reputation for institutional discretion and dull reliability. That only makes the scandals, public legal battles and mounting losses at Credit Suisse Group AG more striking and hard to comprehend.
In mid-March, unease about the bank’s mounting problems snowballed and its shares slumped, forcing management to appeal to Swiss banking authorities for a public vote of confidence.
What went wrong?
Credit Suisse’s failings have included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former employee and an executive and a massive leak of client data to the media.
Its association with disgraced financier Lex Greensill and failed New York-based investment firm Archegos Capital Management compounded the sense of an institution that did not have a firm grip on its affairs. Many fed-up clients have voted with their feet, leading to unprecedented client outflows in late 2022.
What triggered the latest share slump?
Chief Executive Officer Ulrich Koerner launched a massive outreach to woo back nervous clients and their cash. The effort appeared to be paying off by January, with it reported “net positive” deposits.
However, on Mar 9, the US Securities and Exchange Commission queried the bank’s annual report, forcing it to delay its publication. Panic spread after regional US lender Silicon Valley Bank failed, the victim in part of risky investments and rising global interest rates that eroded the value of its bond holdings. Investors began ditching anything that smelled of banking risk and deposit flight.
How bad did the situation get?
On Mar 15, Credit Suisse stock slumped anew when the chairman of its largest shareholder, Saudi National Bank, ruled out investing any more in the company.
This prompted Credit Suisse to ask the Swiss central bank for a public statement of support. The cost of insuring the bank’s bonds against default for one year surged to levels not seen for major international banks since the financial crisis of 2008.
As other banks sought to hedge their counterparty risk for transactions with Credit Suisse, quoted prices for a one-year credit default swap jumped from 836 basis points, indicating a probability of defaulting of 10 per cent on Mar 14 to higher than 3,000 basis points.
