Founded 170 years ago, Credit Suisse (NYSE: CS), the renowned Swiss bank, is taking sweeping measures in an effort to recover from recent setbacks that include misconduct, sanctions evasion, money laundering and tax evasion over the last decade. This far-reaching restructuring plan is designed to turn their fortunes around and restore their past success. For five quarters in a row, the bank has seen nothing but losses, prompting a second major restructuring in as many years due to a combination of scandals, executive changes, and client withdrawals.
The bank’s troubles have been compounded by losses from the collapse of Archegos Capital and Greensill Capital in 2021, which hit Credit Suisse hard. The refusal of Credit Suisse’s biggest shareholder to bolster funding sent shockwaves through the Zurich bourse, causing its stocks to plunge by an astounding 20%, sending shockwaves throughout the entire European banking sector.
“Material Weaknesses” Found in Financial Reporting
Credit Suisse recently reported identifying “material weaknesses” in its internal controls over financial reporting, which has led to a reassessment of its financial position. The bank has divulged that its financial reporting processes for 2021 and 2022 have unveiled “material weaknesses” that could have caused “misstatements” of financial results, dealing another blow to the beleaguered bank as it released its long-awaited 2022 annual report. To make matters worse, the Swiss bank reported a hefty loss of 7.3 billion Swiss francs in 2022; up from a 1.7 billion Swiss franc loss in 2021.
Gazing upon Credit Suisse’s diminishing core business over the past decade, and noting how it has swiftly deteriorated in the past year, it’s plain to see that the company is at the cusp of disaster. Nevertheless, this does not necessarily suggest the bank will go belly-up. The bank claims to be well-capitalized, and barring any unforeseen events, it looks unlikely to encounter an abrupt crash. Nevertheless, Credit Suisse has recently requested assistance from the Swiss National Bank to help bolster trust and stability for the bank.
Recent Bank Crisis in U.S. Puts Focus on Credit Suisse and Global Banking Industry
As global interest rates soar and economic activity dwindles, the occurrence of unexpected business and financial institution collapses has become increasingly common. As Warren Buffett once said, “when the tide goes out, you see who’s swimming naked.” The economic ebbs and flows of the past year may be a harbinger of more to come, leaving Credit Suisse vulnerable to unpredictable “black-swan” event-driven losses, a tricky situation to navigate.
If a collapse were to occur, a total of 66,540 employees could lose their jobs, with 50,110 of these being in-house roles. As one of the world’s “too big to fail” systemically important financial institutions integral to the economies it serves, Credit Suisse’s recent downturns have prompted speculation that the giant financial giant may be facing insolvency within the next couple of years. Undeniably, there are a plethora of strong indicators throughout history that point to this, such as plummeting capitalization ratios, a drastic drop in all segment revenues, a sharp climb in credit default swap prices (default risk) and ambitious restructuring plans.
Recent collapses of Silicon Valley Bank and Signature Bank in the United States have drawn attention to Credit Suisse’s tribulations. Those failures caused steep sell-offs in U.S. regional bank stocks, and now have investors worried if there are more “dominos” to drop. The woes of Credit Suisse, although disconnected from mid-tier U.S. banks, could be enough to prompt a general review of the banking system by investors when paired together.
Credit Suisse’s largest investor, Saudi National Bank, has signaled that it would not be rushing in with more cash to help buttress the firm. The bank declared that it is taking proactive steps to resolve the issues, which may require a hefty investment of resources. It cautioned that the troubles could ultimately impact the bank’s access to capital markets and subject it to “potential regulatory investigations and sanctions.”
Credit Suisse has been involved in several scandals over the past 10 years. In 2014, the bank pleaded guilty to facilitating tax evasion by US citizens and was fined $2.6 billion. In 2016, Swiss prosecutors indicted Credit Suisse for reportedly neglecting to execute adequate checks on customers and investigate the origin of funds linked to a Bulgarian drug ring, who purportedly laundered over $146 million through accounts between 2004 and 2008. This criminal trial, commencing in February 2022, is the first ever case against a Swiss bank in Swiss history.
In April 2021, Credit Suisse suffered a staggering $4.7 billion setback after becoming involved in the tumultuous meltdown of the U.S. hedge fund Archegos Capital, for which it had provided brokerage services including lending. Following the event, at least seven executives were let go from the bank. Amidst a plethora of other controversies, the firm has been embroiled in a corruption scandal in Mozambique, accused of spying on a former worker and executive, as well as leaking massive amounts of client data to the press.
The damning catalogue of Credit Suisse’s misdeeds encompasses a criminal conviction for abetting drug dealers in laundering money in Bulgaria, a Mozambique corruption saga, a nasty spying affair involving an executive and an ex-employee, and the large-scale dissemination of confidential client information to the press. Unveiling that Credit Suisse has served as a clandestine partner to criminals, money launderers, and crooked politicians, the renowned banking corporation is faced with a major public relations debacle.
In conclusion, Credit Suisse’s recent struggles have brought into question the future of the 170-year-old Swiss bank. The bank’s significant declines, compounded by multiple scandals over the past decade, have led to a major restructuring plan aimed at stemming significant losses and reviving operations. However, the recent identification of “material weaknesses” in its financial reporting processes for 2021 and 2022, coupled with a hefty loss of 7.3 billion Swiss francs in 2022, has raised concerns among investors about the bank’s financial health. Credit Suisse is considered “too big to fail,” and its collapse could have a significant impact on the global economy. While the bank appears unlikely to face “sudden” failure, rising global interest rates and curtailed economic activity could trigger “black-swan” event-driven losses, making it challenging to predict the future of the bank. Ultimately, Credit Suisse’s troubles highlight the need for proper risk management and regulatory oversight in the banking industry to prevent similar scandals and failures in the future.