From Ferdinand Marcos To Russian Oligarchs, Troubled Credit Suisse Is A Flagrant Recidivist

Credit Suisse is one of the thirty globally systemically important banks.

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What happens when you repeatedly let cocaine dealers, crooks, and kleptocrats use your bank? The Swiss National Bank approves you for a loan up to 50 billion francs ($54 billion). Credit Suisse demonstrated yet again the advantage of being a globally systemically important bank (G-SIB). Central banks, bank regulators and treasuries rescue big banks for fear of the havoc that Too Big Too Fail (TBTF) banks can cause around the globe.

History of Recidivism

On Tuesday the bank announced that it had significant weaknesses in its financial reporting in 2021 and 2022. This is hardly the first time that Credit Suisse has shown it significant operational risk exposure, that is, problems with its employees, processes, and technology. In their article, Crooks, Kleptocrats, and Crises, Kalyeena Makortoff and David Pegg walked us down an over two-decade memory lane of scandals at Credit Suisse.

1986 Helping Ferdinand and Imelda Marcos with their absconded funds
1999 Shredding Party- Japanese authorities fined Credit Suisse for destroying evidence in an investigation
2000 Banking for a Nigerian dictator
2004 Money laundering for a Japanese crime gang
2009 Fined for breaching US sanctions against Iran and Sudan between 1995 -2007
2011 German tax evasion of 1,100 Germans holding accounts at Credit Suisse
2012 Bankers fraudulently overstated price of mortgage backed securities based on subprime loans
2014 Helped Americans evade taxes
2016 Helped Italians evade taxes
2016 Anti-money laundering fine in the U.S.
2017 Anti-money laundering fine for the bank’s role in 1MBD
2017 European tax evasion
2018 Weak controls linked to dealings with oil companies Petrobras, PDVSA and FIFA
2018 Fraud involving Georgian prime minister
2018 Jobs for business scandal in Hong Kong and China
2019 Corporate espionage
2020 Opened banking accounts for Bulgarian cocaine traffickers
2021 Archegos collapse
2021 Greensill scandal in the UK
2021 Mozambique tuna scandal
2022 Under investigation for possible ties to Russian oligarchs
2023 Material weaknesses in financial reporting

Market Signals Have Been Warning Us About Credit Suisse’s Problems

The market’s displeasure with Credit Suisse has been particularly evident since 2021. Since its recent peak of $14.45 on February 26, 2021, the stock has declined by over 85% to $2.16 on the close on March 15.

Since February 2021, Credit Suisse’s stock price has plummeted by 600%.

Market Watch

FitchRatings and Moody’s Investor Services both downgraded Credit Suisse in 2022 and have it designated with a negative ratings outlook.

Credit Suisse has a negative rating outlook with two of the three global rating agencies.

FitchRatings

Presently, Credit Suisse’s Liquidity Coverage Ratio is 150%, which should mean that even during significant credit and market stresses, it would have enough high quality liquid assets to cover stressed cash outflows. Yet, if that figure is correct, it begs the question why Credit Suisse ran hat in hand to the Swiss National Bank for help.

How Do You Solve A Problem Like Credit?

Resolving a bank like Credit Suisse would involve multiple regulators around the world.

Bettman Archive

Key regulators around the world should be having lots of conversations right now about how they would work together if Credit Suisse were to fail. This bank is one of the 30 globally systemically important banks (G-SIBs), because of all the countries that it is in, as well as its asset size, complexity, and interconnected to other G-SIBs and corporations.

Credit’s asset size of over $800 billion is the size of the entire Swiss gross domestic product. That market participants are nervous about whether Swiss regulators would have to rescue or resolve the banks is pressuring the Swiss Franc. Swiss government yields are also demonstrating that the country would be in serious trouble if it had to bailout the bank. Switzerland cannot survive by selling chocolates and cuckoo clocks to tourists; it is all about its enormous banks.

If heaven forbid Credit Suisse were to fail, it would be a cross border nightmare. Credit Suisse has hundreds of legal entities and over 150 offices in over 50 countries.

Principal legal entities overview, January 2023

Credit Suisse

The bank is comprised of insured depositary banks, broker dealers, and asset managers. All of these are regulated by different bank and securities regulators in different countries. To resolve this type of bank would require serious cooperation by all these different regulators.

Credit Suisse has numerous supervisors around the world.

Credit Suisse

Deficiencies in U.S. Resolution Governance and Liquidity Forecasting

In the U.S. Credit Suisse is regulated by the Federal Reserve. Dodd=Frank Title I requires it to submit a bank resolution plan, often referred to as a living will. The plan, which is only for legal entities in the U.S., details what internal and external factors could cause the bank to fail and how it could be resolved. While the contents of the plan are confidential, the Executive Summary is available to the public.

Material entities in the U.S.

Credit Suisse

At the end of last year, the Federal Reserve and the Federal Deposit Insurance Corporation stated that Credit Suisse’s living will showed resolution planning governance deficiencies. “The Agencies jointly identified a deficiency regarding Credit Suisse’s resolution planning governance that resulted in an insufficient 2021 Targeted Plan. The Agencies were unable to assess the feasibility of Credit Suisse’s resolution plan, including whether it would facilitate an orderly resolution under the U.S. Bankruptcy Code, because the plan lacked necessary information and adequate detail.”

Also of note, the regulators stated that “another significant weakness is related to a shortcoming finding made by the Agencies regarding the 2018 Plan concerning Credit Suisse’s model and process for estimating the liquidity needed to fund its U.S. material entities during a resolution” Additionally, it does not give me comfort that the regulators found that “The 2021 Targeted Plan’s poor quality and lack of content as well as outstanding concerns related to cash-flow forecasting referenced above call into question the sufficiency of the firm’s governance for its U.S. resolution planning process and raise questions about the feasibility of Credit Suisse’s U.S. resolution plan.”

I am troubled by the fact that the “Agencies also jointly identified a deficiency regarding the firm’s cash-flow forecasting capabilities. The 2018 Letter described weaknesses related to Credit Suisse’s cash-flow forecasts as part of the 2018 Liquidity Shortcoming. The 2018 Letter also specified a series of enhancement initiatives that the firm should complete. Based upon their review of the 2020 Plan, the Agencies concluded that Credit Suisse adequately addressed the 2018 Liquidity Shortcoming. This conclusion was communicated to the firm in the 2020 Letter.”

No bank of this size has ever failed, and let’s sure hope that it stays that way. Today’, Credit Suisse’s stock has risen, calming markets somewhat. However, I doubt that the bank’s significant operational risk problems have been solved.

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Source: https://www.forbes.com/sites/mayrarodriguezvalladares/2023/03/16/from-ferdinand-marcos-to-russian-oligarchs-troubled-credit-suisse-is-a-flagrant-recidivist/