How Does a Bank Fail? 8 Reasons Why Credit Suisse Collapsed (Part Two)

In the first part of this article series, we explored how much of Credit Suisse’s business model was built on facilitating tax evasion for wealthy foreigners. But the bank’s reputation for secrecy, and their enthusiasm for turning the other cheek, appealed to other demographics as well.

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How Does a Bank Fail? (Part Two)

Some of the reasons behind the collapse of Credit Suisse were genuine, structural, even in some ways inescapable. And some of the reasons were utterly ridiculous. 

#4 Failing to learn from the Financial Crisis

In the Fall of 2008, it was Credit Suisse’s rival, UBS, that was in crisis.

The global recession that began in New York affected the entire globe, but not necessarily in equal proportion. “Europe’s biggest casualty of the subprime crisis” was facing an extinction event, hemorrhaging deposits – 75 billion U.S. dollars worth of assets in Q3 alone – and having to dig deep into its cash reserves just to stay temporarily afloat. Finally, to save its biggest bank from failure, the Swiss government stepped in with a bailout.

Credit Suisse hardly escaped the Financial Crisis unscathed. It wrote down billions of dollars worth of subprime holdings and leveraged loans, and reduced its investment banking business in general. It cut more than a trillion dollars worth of assets from its books, along with thousands of jobs, and faced ongoing investigations from U.S. authorities for years thereafter. It did not, however, need to accept a bailout from the government.

Some experts have pointed to how relatively well Credit Suisse fared in the 2008 fallout as a reason for its ultimate demise.

At UBS, “there was a kind of a reset of the culture,” one expert told Bloomberg. “It came out of that [period] a much more humble, much reduced bank.”

By contrast, another expert noted, Credit Suisse “fired a lot of people – senior people who were watching out for risky trading positions – and instead they hired a lot of young people who probably did this job for the first time. And that later backfired.” The bank continued to coast on its old reputation for security and secrecy, with a new, rotating and inexperienced guard.

#5 Reacting too slowly to major risks

In April, 2021, seven Credit Suisse executives were removed from their posts, including its chief risk and compliance officer and the head of its investment bank.

This was hardly an overreaction. In weeks prior, Credit Suisse had unexpectedly lost billions of dollars thanks to two separate, avoidable disasters.

In March, Greensill Capital – a company which lent money to other companies, by buying their invoices upfront – was shuddered, after its extreme risk caused credit insurers to tuck and run. Credit Suisse was left holding the bag, with 10 billion U.S. dollars worth of assets locked in the troubled firm (much of which was recovered later on). An investigation by the Swiss supervisory organization FINMA found that Credit Suisse “seriously breached its supervisory obligations in this context with regard to risk management and appropriate organisational structures.”

It must have felt like deja vu when, mere days later, the investment fund Archegos Capital went under. Few outside of Archegos itself were as impacted as Credit Suisse, which took a loss of 4.7 billion dollars thanks to their relationship with the over-leveraged firm. Again in this case, a third-party investigation of Credit Suisse “found a failure to effectively manage risk in the Investment Bank’s Prime Services business by both the first and second lines of defense as well as a lack of risk escalation.”

#6 Aiding Russian oligarchs

Besides American tax cheats and European drug lords, the secrecy afforded in Swiss banking has also attracted powerful oligarchs. “Long known as a destination for war criminals and kleptocrats to stash their plunder, Switzerland is a leading enabler of Russian dictator Vladimir Putin and his cronies. After looting Russia, Putin and his oligarchs use Swiss secrecy laws to hide and protect the proceeds of their crimes,” the Helsinki Commission explained last year.

Of the Swiss banks, Credit Suisse was Russia’s favorite. According to Bloomberg, it recently possessed as much as 33 billion dollars worth of Russian money, 50% more than its rival UBS.

Following the invasion of Ukraine, the Swiss government joined in the Western effort to (imperfectly) sanction Russia’s elite. That put Credit Suisse’s customers in the firing line, a minor but not insignificant inconvenience for an already struggling institution.

#7 Having bad timing

More than any other industry, banking relies on trust. If customers don’t trust that their money is safe with their bank, they will pull it out as fast as possible.

Such was the case earlier this year, after Silicon Valley Bank failed, and then the U.S. government took control of a second, Signature Bank. As customers and investors in those banks wondered whether their money was safe, all of a sudden, people around the country and beyond began to worry about the same.

As CNN noted: “Investors around the world were thoroughly rattled by the collapse of Silicon Valley Bank and Signature, making the banking sector particularly vulnerable to any signs of trouble.” The problems with those banks were largely separate from those at Credit Suisse – which actually survived a run the year prior – but the “global bank psychology” was at a low point, so the Swiss’ investors and regulators were quicker to jump to protective actions than they otherwise might have been. A takeover by rival bank UBS was arranged within days of the SVB and Signature failures.

#8 Overly relying on a single investor

Some have claimed that the entire collapse of Credit Suisse was predicated on just one, brief interview. In fact, just five words of it.

The bank needed money, and everyone knew it. Its largest single investor – the exorbitantly wealthy Saudi National Bank, with its 9.88% stake – was best-positioned to provide that extra funding. On March 15th, the Saudi bank’s Chairman was asked in front of a T.V. camera whether such a move was in the cards. “The answer is absolutely not,” he replied.

There were “many reasons” the Saudis wouldn’t invest more in Credit Suisse, he said, but the simplest had to do with regulatory standards. “If we go above 10%, all kinds of new rules kick in,” he explained, “whether it be by our regulator, or the European regulator, or the Swiss regulator, and we’re not inclined to get into a new regulatory regime.”

Immediately, Credit Suisse’s stock price plummeted around 30%. Within hours, the Swiss National Bank offered an olive branch, pledging a 50 billion franc loan to the struggling bank, but it was too late. Credit Suisse was acquired by UBS, ending its 167-year run, just a few days thereafter.

With an institution the size of Credit Suisse, arguably no single person or event, however significant, can cause a full-on collapse. These stories are dramatic, complicated, and difficult to unpack. In reality, there are far more than just eight reasons for what happened to Credit Suisse — far more than can be summarized in an article, or a few.

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