The writer is a former chief executive of Credit Suisse
Like everyone else, I watched the events unfolding in Zurich in recent days with something akin to stunned disbelief. When I stepped down as the chief executive of Credit Suisse, it had just posted its highest profits for 10 years after a deep restructuring. And though I managed the tricky situations that developed under my watch effectively, things have gone wrong in the years since.
Little more than three years later, the same bank, part of Switzerland’s national fabric for more than 160 years, was ushered into the arms of its biggest rival, UBS, over the course of a frantic weekend.
Sadly, there will be a human impact on the many thousands of people, and many former colleagues, who are likely to lose their jobs following this rescue. Since I left the bank in February 2020, I have mostly refrained from commenting on Credit Suisse, but the turn of events now compels me to speak.
A big part of my job as chief executive — helped by a dedicated team — was setting a new course towards wealth management and away from investment banking to fully realise the potential of the franchise. But just as big a task was strengthening the balance sheet, which ranked bottom of the list of systemically important banks when I joined. So we raised SFr10bn of equity, tackled multibillion-dollar legacy issues, from the US mortgage securities market to Mozambique, cut risk exposure by 45 per cent and eliminated more than SFr100bn of impaired assets.
Risk was always a priority for me. It was clear that the bank’s risk systems needed a major investment and that this would be a large, multiyear undertaking. I often described this as a 10-year job, which was clearly not complete by the time I left. A few days into the role, one of my first decisions was to approve $150mn of new investment in risk management systems. We also increased compliance staff by more than 40 per cent, even when we were conducting a major cost-cutting programme across the bank.
It was clear that until risk and compliance systems were materially improved, behaviour and culture would be more important than ever. After the initial and well-publicised losses in distressed debt experienced in late 2015, I shut that business down, reduced our risk appetite and made sure everybody understood I wanted to hear bad news when it happened. We managed to get through 16 quarters without a serious issue, had more than $200bn of wealth management inflows, cut risk and cut both operating and legacy costs. By 2019, Credit Suisse was making nearly as much profit as its new owner UBS. Its current plight saddens me. But we need to focus on what happens now.
UBS has said it will keep Credit Suisse’s “crown jewel”, the standalone Swiss bank I created that has been a consistently strong performer despite the wider group’s issues. However, regulators should look again at whether they ought to allow a single domestic player of this size in the Swiss market. Arguably, UBS attempting to absorb CS’s Swiss universal bank would do little except add thousands more job losses to those already expected in investment banking.
From a wider perspective, policymakers need to raise investors’ confidence in the European banking sector. The treatment of the holders of additional tier 1 bonds (AT1s) has created significant uncertainty. What happened will play out in the courts for years.
There is a basic principle that common equity takes the hit first. It seems that the treatment of AT1s — even if correct under the current Swiss rules — will raise the cost of capital for Swiss banks and for European banks. This will have some of their US peers rubbing their hands. AT1s or “cocos” are an important source of capital for European banks, and because of the market appetite, interest rates may not have fully reflected the risks involved. This new layer of uncertainty will have an adverse impact on the competitiveness of the European banking sector. Net net, US and Asian rivals could come out of all this relatively stronger.
A related issue is that shareholders were denied a vote with emergency law changes, which shocked many investors and market participants. Of course, this was an emergency. The alternative could have been far worse. But after the thousands of hours spent working on things like resolution plans since 2008, the episode shows the need for further work to codify approaches to banking crises and be more transparent with investors over the likely response from policymakers. We must learn the lessons from the past few days — otherwise Credit Suisse will have fallen in vain.