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Credit Suisse’s carnage targets financial risk for banks

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This content was published on June 18, 2021 – 09:00 Credit Suisse’s disastrous Greensill and Archegos investments have highlighted the destructive side of banking. Regulators and politicians are asking what the Swiss bank did wrong and what can be done to protect investors from future risk-assessment failures.

Matthew Allen

June 18, 2021 – 09:00

When not covering fintech, cryptocurrencies, blockchain, banks and trade, swissinfo.ch’s business correspondent can be found playing cricket on various grounds in Switzerland – including the frozen lake of St Moritz. 

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Experts point to shortcomings in risk management and say corporate culture has to change.

Meanwhile, Switzerland’s second-largest bank is also scrabbling to pay back investors some $10 billion after its fateful involvement with the failed financial services firm Greensill Capital.

The collapse of the US family office Archegos Capital Management cost Credit Suisse around $5 billion (CHF4.5 billion) by April.

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Credit Suisse’s losses led to a quarterly loss and forced it to find CHF1.8 billion to shore up loss-absorbing capital buffers.

The bank has also reportedly been drawn into a legal row with the giant Japanese investment company Softbank that had poured money into Greensill.

The reputational damage for the bank has been enormous, forcing it into a managerial shake-up and a comprehensive re-think on the way it conducts such business. In a highly competitive market, Credit Suisse now faces a battle to convince investors that it remains a credible venue to invest their assets in future.

“A tough period and hard decisions lay ahead of us,” says its new chairman António Horta-Osório.

The risks involved in both investments, while complex, could have been better identified, according to Andreas Ita, managing partner of Zurich-based risk management consultancy Orbit36.

Flawed models

But such models appear to have flaws when investing in hedge funds, family offices and other financial companies in the less heavily regulated sector known as “shadow banking”. Especially when low interest rates cut off bread and butter profits in traditional investments, forcing banks to search for new revenue streams.

Ita points to a range of likely shortcomings in risk management, including inadequate stress-testing methods, compensation schemes using the wrong incentives and a potential disconnect between employees executing trades and directors. “All too often people think: ‘We have risk models in place so we can just look at the numbers and things will be fine’,” he told SWI swissinfo.ch.

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