Credit Suisse, time for some real digital transformation?

In case you have missed it, Credit Suisse recently lost a lot of money on a bet that turned sour. Actually, on several bets that happened to all go in the wrong direction, at roughly the same time. What is really going on at the Swiss bank? Isn’t an old incumbent bank inherently good at managing risk or is it just a myth? Is it maybe time for some well-needed digital transformation at Credit Suisse?

A bit of background on Credit Suisse…

Credit Suisse is an old financial institution. The Swiss bank has been around for hundreds of years as it was founded in 1856. Protecting rich people’s money, primarily as a private bank. That is their bread and butter, like many other old Swiss financial institutions.

Credit Suisse had its fair share of dramas lately. Besides the obvious tax probes that you would expect when talking about a secretive private bank. The previous CEO, Tidjane Thiam, had to leave because of a spying scandal. That could be out of a Hollywood film, but it actually turned out to be true. Spying on a former employee that went out to work for a competing Swiss bank, UBS. Not cool. But after that, the Swiss bank thought that it was out of the woods. That it was all back to business as usual and able to make money like all the other investment banks.

Not so fast…

When risk management is not your forte

The first scandal this year came via Greensill, the fintech that wasn’t. Credit Suisse suddenly realised that it was exposed more than it should have. When the invoice and supply chain finance company collapsed, Credit Suisse found itself holding the bucket. A circa $3 billion bucket that is now impacting its relationship with some of its clients. Fair enough, these things happen. Most probably, a managing director got a lobbying call from David Cameron and thought that it would be a good idea to lend some money to Greensill. That is just a speculation. Maybe the Swiss bank just thought that the fintech was an incredible business. Actually, the regulators and lawmakers want to understand exactly why Credit Suisse started doing business with Greensill and what went wrong.

Fool me once…

Shame on you, fool me twice… shame on Credit Suisse. The Greensill fiasco was embarrassing enough. But then came Archegos, an over-leveraged family office that blew up when the positions that it was taking went the wrong way. A $5.5 billion blow up.

Again, Credit Suisse found itself holding the bucket. The Swiss bank lost big after having to panic-sell most of Archegos portfolio. But it gets better.

Firstly, Credit Suisse had no idea what its exposure to actually Archegos was. As in, their systems were not flagging that a single customer was doing billion-dollar trades with a ten-time leverage on their back. The CEO and the CRO had no idea who Bill Hwang was. Fair enough if the relationship was managed in the lower ranks. But usually the executive team knows who the big clients are.

That, in itself, is quite telling.

Then there is the fact that Credit Suisse was barely making any money on this client. A paltry $18 million in 2020 in fees, give or take, for a $20 billion exposure. Quick maths, that’s bad. That’s basically the return you would have on a vanilla mortgage. You can see clearly that even in a year when everything goes in the right direction, like in 2020, the bank did not make that much money. When the wind changes, the losses are big. To make matters worse, Credit Suisse only asked for a 10% margin for the equity swaps with Archegos. That is not great at all.

What is going on at Credit Suisse?!

It’s fair to say that risk management is not Credit Suisse’s forte at the moment. Obviously, the bank is probably not that bad at it. It has been around for more than 150 years and went through the Great Financial Crisis relatively unscathed. In comparison to other investment banks that were close to or collapsed entirely (hello there, Lehman Brothers). It is fine to lose a bit of money here and there. It happens a lot in the financial markets and finance more generally. Losing a big chunk of money because of miscalculation, errors and lapse of judgement is much more worrying. Especially for very little upside like with Archegos.

Wall Street bro

There is definitely a Wall Street effect, and wider economics. Wall Street effect as in the Swiss investment bank wanted to beat its peers. Be part of the gang for real. So it went all out trying to get more business and bigger yields where it could. That’s how you end up having a family office with a ten-times leveraged portfolio not collateralised as a client.

Credit Suisse is originally a private bank that has tried hard to develop its investment banking business. But it is no Goldman Sachs or Morgan Stanley. Its DNA is different. And it has shown in the talks over the weekend between all these players, just before the Archegos collapse. Credit Suisse was left hanging dry. Because at the end of the day, business is business.

That is also in itself driven by wider economics: quantitative easing is pushing valuations across all asset classes to all-time highs. It becomes harder to make a decent return without increasing exposure to risky assets. It encourages certain types of behaviour that can be harmful for some investment businesses.

Time to upgrade, Credit Suisse…

It also shows that Credit Suisse is still relying on antiquated systems.

How come the bank’s management, or even the risk teams, did not know what the exposure to Archegos was in real-time? Complex products or not, the bank should have known how much it was standing to lose. That is basically the role of a bank! At least having a sense of a ballpark number…

But without the right technology and process in place, it is not possible.

It’s 2021. Managing risks with Excel dashboards is not enough any more.

Particularly for a large international bank like Credit Suisse. It’s time to upgrade and go through a deep digital transformation that will bring decent risk management systems across the organisation. The Swiss bank is already spending billions for its digital transformation. But how is it spending that money?

The main reasons for this digital transformation are, as usual, to keep up with new entrants, cut costs and so on. The problem is when you overly focus on customer experience aspects, and not enough on core systems. You know, boring stuff like risk management…