Credit Suisse reveals where it went wrong
The Swiss bank’s defense was the same as for recent revelations about dodgy customers or due diligence lapses: these are historic issues from the time things were done differently. Its leaders have been telling us for some time that the bank has already changed.
That assertion sounds awkward with its deep dive into risk, compliance and technology presented to investors on Tuesday. The bank’s plan to improve these core functions contained tacit admissions of how poorly they were managed until the shocks of its failures with Archegos and Greensill Capital last year.
Let’s take an obvious part: customer risk management. The bank’s chief compliance officer, Rafael Lopez Lorenzo, explained how he was going to ensure that everyone it hired and the transactions they wanted to make were now screened effectively and efficiently. Key criteria to consider included the risk of sanctions, politically exposed persons and convicted persons. They will also ensure that they perform ongoing know-your-customer work and increased due diligence for high-risk customers.
He said this would bring Credit Suisse in line with “industry best practices”. That still sounds like an understatement to me for being no worse than average. I’ve written before that working with the richest people in the world will always involve political and corruption risks. But Credit Suisse should have been carrying out these kinds of checks years, if not decades, already.
The theme behind everything described on Tuesday is to change the modus operandi of banking from one where its bankers have been given enough free rein to chase fees and revenues wherever they are, to one where the Zurich head office will have much more control over what can be sold and to whom.
This promises more efficiency and better risk control but involves giving up some business. In addition to pulling out of prime financing – the hedge fund lending business – Credit Suisse has cut superyacht lending by more than 20% over the past year; reduced lending to private equity buyouts by 25%; and reduces the risk associated with equity-backed margin loans. Some cuts should be cyclical: leveraged loans are going through a bad patch for all banks, for example. But some are definitely lost cases.
Credit Suisse’s centralization of control should also ensure that all of its technology is purchased and managed more consistently and efficiently. Joanne Hannaford, chief technology officer who joined Goldman Sachs Group Inc. this year, said she was very surprised at the cost-cutting opportunities she found during an audit of her expenses. There will be about $200 million in savings this year and another $400 million in the future, she said. However, analysts including RBC Capital Markets’ Anke Reingen were disappointed that there was no new target to cut the group’s costs.
For investors, the question remains how long Credit Suisse’s rehabilitation will take. The trauma of 2021 has subsided, but it has a lot to rebuild in terms of technology, personnel, and business practices, which will initially slow its normal operations. And while Credit Suisse is busy fixing things, competitors like UBS Group AG and Morgan Stanley are investing in technology to give them better products and services that are faster and easier to use. Credit Suisse says 2022 will be its year of transition. But for shareholders, it seems likely that it will have to catch up for much longer than that.
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Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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