Crisis of confidence
05 April 2023
Jenna Lomax examines the recent Credit Suisse crisis and questions if the incident proved that post-2008 regulations are no longer fit for purpose when it comes to managing risk
Image: art.disin /stock.adobe.com
To say that the global economy went into meltdown after Credit Suisse’s shares dramatically slumped last month would be an overstatement. It remains an overstatement, largely thanks to UBS, who acquired the Swiss bank under emergency orders issued by the Swiss Federal Council on Sunday 20 March.
Far from a lazy Sunday, other central banks and global stock markets simultaneously scrambled to keep the market afloat that day, as chairman of UBS, Colm Kelleher, deemed the crisis “an emergency rescue.”
By 12:57pm (GMT), the BBC’s business editor Simon Jack remarked: “Regulators in Europe, the UK and the US will be breathing a sigh of relief that the deal for UBS to buy Credit Suisse at a knockdown rate [...] has seemingly calmed frayed nerves.”
For those wondering, it was bought for 3 billion Swiss francs (US $3.25 billion, £2.63 billion).
Jack added: “The regulators have moved quickly and offered more help than banks have currently taken up — which means they either fear things could be worse than they look, or they want to stay a step ahead of events. Everyone hopes it’s the latter.” Just 13 minutes later, a Downing Street spokesperson released a statement affirming that “the UK banking system remains safe.”
UBS’s move managed to quell what Swiss regulator FIMNA described as a “crisis of confidence.”
At that point, comparisons to the 2008 Financial Crisis began to simmer down. That year’s aptly titled Madonna hit: “4 Minutes (To Save the World),” was saved airplay over a montage of stock market floor panic. Perhaps that’s a good thing — let’s leave that song in the noughties.
Skip forward to 2023 and we have a rise in interest rates, due to wider geopolitical turmoil including, but not limited to, the Russian invasion of Ukraine. Aside from Putin’s horrific attack on humanitarian liberties, the ongoing conflict has hit the value of investments across the world. This has underpinned a lack of investor confidence and bank share prices.
However, the more central issue at the heart of the Credit Suisse saga is arguably the need for more accurate financial reporting. Better reporting could have highlighted the road to Credit Suisse’s own car crash, before so much damage was done. Yet it appears no one at Credit Suisse was looking in the rear-view mirror, nor judging the onward traffic.
“With investors scrutinising performance daily and imminent new regulations demanding more reporting, there has never been a more pressing need for financial institutions to overcome their client and regulatory reporting challenges,” explains Clement Miglietti, chief product officer at NeoXam.
“The issue is, as with so many issues relating to market infrastructure, the bigger the problem the harder it is to produce a definitive solution,” he adds.
On Monday 21 March, tensions around the health of banks were contagious. In today’s world, money can be moved at the click of a button when even the slightest of doubts are catching. But despite the anxieties, that morning, the Dow Jones and the S&P 500 indicies were both up, with Nasdaq only down slightly. The initial fear seemed to peter out in the aftermath — again, largely thanks to UBS and FINMA.
Sign of the times
However, let’s not forget that Credit Suisse’s crisis was not a one-off glitch in the matrix. Small reverberations had been making waves elsewhere, and certainly before 20 March. On 10 and 12 March respectively, US banks Silicon Valley Bank (SVB) and Signature Bank collapsed.
Anatoly Crachilov, CEO and founding partner of Nickel Digital, says of SVB’s demise: “It’s significant. Not only because SVB has grown to become a top-20 US bank by total assets, but because its failure has highlighted accounting arrangements that allow banks to legally conceal accumulated losses.
“The daily mark-to-market approach implies that trading assets are carried on their fair value — the closing price of each trading day. However, current accounting standards allow banks to carry some securities at their original acquisition price without the need for mark-to-market, as long as they are formally classified as ‘held to maturity (HTM)’.
“In the case of SVB, the ‘unrecognised’ losses in their HTM portfolio grew to staggering proportions. In Q3 2022, the HTM portfolio contained US $15.9 billion of unrealised losses, compared to just $11.5 billion of the bank’s tangible common equity. Effectively, SVB has been insolvent since at least last September,” affirms Crachilov.
At time of writing, SVB’s rival First Citizens BancShares bought its assets and loans. Despite SVB’s ‘eleventh-hour saving’, calls for accurate and timely reporting still abound.
As NeoXam’s Miglietti affirms: “[Accurate and timely reporting] may not solve all the headaches financial institutions face, but they will at least move the issue on from something that is endlessly debated to a tangible solution.
“Good reporting allows institutions to focus their efforts on expanding services to investors, opposed to being weighed down by heavy reporting administration,” he adds.
Where did it all go wrong, can it be made right?
Headquartered in Zürich and established in 1856, Credit Suisse grew to be the second-largest lender in recent years. However, in hindsight, the writing seemed to be on the wall in October when it cut 9000 jobs and restructured its business. As recently as 16 March, it borrowed US $54 billion (£44.5 billion) from the Swiss central bank to balance the books. Credit Suisse was considered ‘too big to fail’. Yet so was the Titanic, a mere two hours before it hit the ocean floor. Were the warning signs too late for Credit Suisse to avoid smashing into its own metaphorical iceberg?
“Since 2008, increased regulatory requirements in corporate governance, risk-taking, and liquidity provisions have created positive structural adjustments in the banking sector,” affirms Massimo Ferrari, CEO of Assetmax AG, an Infront company.
Despite this, Ferrari adds: “Wealth management is a rewarding industry for the firms who know how to navigate a post-2008 world. The recent events hit on one important area in particular: regulatory expectations have failed to meet the risk management and governance policies implemented by some institutions, despite institutions being better capitalised and more robust than in 2008.”
He concludes: “More effective risk management can be achieved at the firm level through better data and improved analytical capabilities, alongside employing strong portfolio management systems that give teams complete visibility within and across client portfolios.”
Far from a lazy Sunday, other central banks and global stock markets simultaneously scrambled to keep the market afloat that day, as chairman of UBS, Colm Kelleher, deemed the crisis “an emergency rescue.”
By 12:57pm (GMT), the BBC’s business editor Simon Jack remarked: “Regulators in Europe, the UK and the US will be breathing a sigh of relief that the deal for UBS to buy Credit Suisse at a knockdown rate [...] has seemingly calmed frayed nerves.”
For those wondering, it was bought for 3 billion Swiss francs (US $3.25 billion, £2.63 billion).
Jack added: “The regulators have moved quickly and offered more help than banks have currently taken up — which means they either fear things could be worse than they look, or they want to stay a step ahead of events. Everyone hopes it’s the latter.” Just 13 minutes later, a Downing Street spokesperson released a statement affirming that “the UK banking system remains safe.”
UBS’s move managed to quell what Swiss regulator FIMNA described as a “crisis of confidence.”
At that point, comparisons to the 2008 Financial Crisis began to simmer down. That year’s aptly titled Madonna hit: “4 Minutes (To Save the World),” was saved airplay over a montage of stock market floor panic. Perhaps that’s a good thing — let’s leave that song in the noughties.
Skip forward to 2023 and we have a rise in interest rates, due to wider geopolitical turmoil including, but not limited to, the Russian invasion of Ukraine. Aside from Putin’s horrific attack on humanitarian liberties, the ongoing conflict has hit the value of investments across the world. This has underpinned a lack of investor confidence and bank share prices.
However, the more central issue at the heart of the Credit Suisse saga is arguably the need for more accurate financial reporting. Better reporting could have highlighted the road to Credit Suisse’s own car crash, before so much damage was done. Yet it appears no one at Credit Suisse was looking in the rear-view mirror, nor judging the onward traffic.
“With investors scrutinising performance daily and imminent new regulations demanding more reporting, there has never been a more pressing need for financial institutions to overcome their client and regulatory reporting challenges,” explains Clement Miglietti, chief product officer at NeoXam.
“The issue is, as with so many issues relating to market infrastructure, the bigger the problem the harder it is to produce a definitive solution,” he adds.
On Monday 21 March, tensions around the health of banks were contagious. In today’s world, money can be moved at the click of a button when even the slightest of doubts are catching. But despite the anxieties, that morning, the Dow Jones and the S&P 500 indicies were both up, with Nasdaq only down slightly. The initial fear seemed to peter out in the aftermath — again, largely thanks to UBS and FINMA.
Sign of the times
However, let’s not forget that Credit Suisse’s crisis was not a one-off glitch in the matrix. Small reverberations had been making waves elsewhere, and certainly before 20 March. On 10 and 12 March respectively, US banks Silicon Valley Bank (SVB) and Signature Bank collapsed.
Anatoly Crachilov, CEO and founding partner of Nickel Digital, says of SVB’s demise: “It’s significant. Not only because SVB has grown to become a top-20 US bank by total assets, but because its failure has highlighted accounting arrangements that allow banks to legally conceal accumulated losses.
“The daily mark-to-market approach implies that trading assets are carried on their fair value — the closing price of each trading day. However, current accounting standards allow banks to carry some securities at their original acquisition price without the need for mark-to-market, as long as they are formally classified as ‘held to maturity (HTM)’.
“In the case of SVB, the ‘unrecognised’ losses in their HTM portfolio grew to staggering proportions. In Q3 2022, the HTM portfolio contained US $15.9 billion of unrealised losses, compared to just $11.5 billion of the bank’s tangible common equity. Effectively, SVB has been insolvent since at least last September,” affirms Crachilov.
At time of writing, SVB’s rival First Citizens BancShares bought its assets and loans. Despite SVB’s ‘eleventh-hour saving’, calls for accurate and timely reporting still abound.
As NeoXam’s Miglietti affirms: “[Accurate and timely reporting] may not solve all the headaches financial institutions face, but they will at least move the issue on from something that is endlessly debated to a tangible solution.
“Good reporting allows institutions to focus their efforts on expanding services to investors, opposed to being weighed down by heavy reporting administration,” he adds.
Where did it all go wrong, can it be made right?
Headquartered in Zürich and established in 1856, Credit Suisse grew to be the second-largest lender in recent years. However, in hindsight, the writing seemed to be on the wall in October when it cut 9000 jobs and restructured its business. As recently as 16 March, it borrowed US $54 billion (£44.5 billion) from the Swiss central bank to balance the books. Credit Suisse was considered ‘too big to fail’. Yet so was the Titanic, a mere two hours before it hit the ocean floor. Were the warning signs too late for Credit Suisse to avoid smashing into its own metaphorical iceberg?
“Since 2008, increased regulatory requirements in corporate governance, risk-taking, and liquidity provisions have created positive structural adjustments in the banking sector,” affirms Massimo Ferrari, CEO of Assetmax AG, an Infront company.
Despite this, Ferrari adds: “Wealth management is a rewarding industry for the firms who know how to navigate a post-2008 world. The recent events hit on one important area in particular: regulatory expectations have failed to meet the risk management and governance policies implemented by some institutions, despite institutions being better capitalised and more robust than in 2008.”
He concludes: “More effective risk management can be achieved at the firm level through better data and improved analytical capabilities, alongside employing strong portfolio management systems that give teams complete visibility within and across client portfolios.”
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