In the current economic climate and in times of rapid technological change, banks are facing unique challenges to their business models. This challenge is especially large in Europe where profitability of banks has been under attack for many years. For many years some European banks have tried to compete with the US investment banks – in some cases by purchasing them. But the recent events surrounding Archegos suggests that they have not been successful in using these new banking opportunities to create profitable sources of not only revenues but also net income for their stakeholders.
A recent series of articles in the Financial Times highlights this conclusion. The first article on 6 April noted that the collapse of Archegos cost Credit Suisse a $4.7 billion impairment charge in their prime broking activities. The article goes on to note: “In theory, prime brokers hedge all exposures, making only a modest margin on their activities. In practice, hedges are rarely perfect. Bonus-hungry bankers can find ways to exploit that.” The article also highlights that Credit Suisse is not the only bank active in this area.
The second article on 20 April goes further to note that Credit Suisse had substantially reduced its risk management capability in the run up to the Archegos debacle as well as the losses it incurred on Greensill. Whilst these losses have led to the departure of several senior managers (and one board member) responsible for risk management, that is a a bit like locking the barn after the horses have been stolen. The article noted that “six current and former Credit Suisse managers said the bank hollowed out risk expertise and trading acumen in favour of promoting salesmen and technocrats. Dissenting voices were suppressed, they said.” As anyone familiar with banking knows, suppression of dissenting voices is almost always the start of a downhill trend.
In an article on 27 April the Financial Times provided an update on the Archegos situation noting that total bank losses on Archegos were likely to exceed $10 billion. Interestingly all these losses were at non-US banks. It would seem that the US banks had in place much better risk management systems that allowed them to exit their exposures with minimal losses.
Finally on 3 May the Financial Times reported that the revenues (not net income but only revenues) on the Archegos relationship were just Swiss francs 16 million in 2020. Clearly a business model that faces potential losses of $4.7 billion for revenues of around $17 million is not sustainable. The only good news from this article comes in the following statement from the new Chair of Credit Suisse, António Horta-Osório: “I firmly believe that any banker should be at heart a risk manager.” Clearly a signal of new times at Credit Suisse.
