Regarding the Archegos debacle, it's clear how deeply negligent Credit Suisse's top management was until recently. The shortcomings are serious and Finma has ordered far-reaching measures applying to the bank and its legal successor, UBS.
The multi-billion dollar debacle with the US hedge fund Archegos Capital Management that put Credit Suisse in dire straits in 2021, is ending with hefty fines and a harsh reprimand from regulators, including the Swiss Financial Market Supervisory Authority (Finma), which has identified serious deficiencies at in the past.
Corrective measures have been ordered and aimed at both Credit Suisse and its legal successor UBS, according to a statement.
Double Fines, Targeted Banker
Following coordinated enforcement proceedings with Finma, the US Federal Reserve and the UK Prudential Regulation Authority issued $269 million and 87 million British pound ($119 million) fines, respectively, against Credit Suisse. This will result in an extra provision to be reported at Credit Suisse, to be accounted for by UBS as part of the acquisition.
The Fed and Finma ordered the bank to undergo far-reaching changes related to credit, liquidity, non-financial risk management, and constant monitoring of such measures. Separately, Finma said Credit Suisse seriously violated financial market law via its relationship with Archegos and opened enforcement proceedings against a former executive at the bank, without naming the individual.
In its proceedings, Finma identified a handful of shortcomings at the fallen Swiss lender.
1. Excessive Position and Risk
As a result of its relationship with Archegos, Credit Suisse amassed a position totaling $24 billion, as of March 2021. This was worth four times the position of the next largest hedge fund client and more than half of the equity of the bank itself.
«The bank was unable to adequately manage the risks associated with this position,» Finma said.
2. No Senior Involvement
Members of Credit Suisse’s executive board weren't informed about the facts of this major fiasco, according to Finma’s findings, adding there was «no requirement that responsible executive board members address significant and risky business relationships on their own initiative as standard».
3. Inadequate Response to Breaches
On monitoring risks at Credit Suisse, Finma said that it was regularly indicated the Archegos relationship had exceeded limits and was exposed to potential losses, though the response was inadequate.
«[T]he employees responsible behaved in favor of the customer. Exceedances were insufficiently complained about,» the regulator outlined.
The bank made additional demands on Archegos that were far too low, while exceeded limits were simply increased repeatedly. Although the overruns were reduced, the actual risk of loss increased.
4. Concentrated Risks
Instead of seeking diversification, Credit Suisse built up concentrated risk with only a few issuers as a hedge, which in some cases led it to amass significant market share.
«Overall, the bank incurred enormous and concentrated risks of loss, which materialized in the subsequent fire sale. The bank took completely insufficient account of the fact that the collateral could not fulfill its purpose in an emergency because it was not diversified,» Finma said.
5. Pre-Collapse Payout
Two weeks before Archegos collapsed, its positions still had high market value and demanded Credit Suisse pay out $2.4 billion. The amount was paid based on a contract certain Credit Suisse employees assumed was obligatory, according to the statement.
«However, there are no indications that the bank examined the possibility internally of not having to make these payments or considered suspending them until additional collateral was provided or offsetting them against such collateral to minimize its risks,» Finma explained.
Overall, Finma deemed there was insufficient organization and risk management at Credit Suisse. It pointed out the bank was «unable to adequately identify, limit and monitor the significant risks associated with Archegos» and «seriously and systematically violated the organizational requirements under banking law».
Corrective Measures
As a result of the events, Finma demands that UBS, as the legal successor to Credit Suisse, apply its restrictions throughout the financial group on positions related to individual clients. It specifically ordered a change in the bank’s compensation system to include bonus allocation criteria that account for risk appetite and to make this change legally binding.
«Therefore, for employees with particular risk exposure, a control function must assess and record the risks taken before the bonus is determined,» Finma said.
In response, UBS said it «will implement its operational and risk management discipline and its culture across the combined organization,» and that it's begun implementing its risk framework, including actions addressing the regulatory findings, across Credit Suisse.
