The Swiss stalwart has undergone myriad structural changes but a cultural transformation is equally important
A financial chamber of horrors including Greensill Capital, Archegos Capital Management, a state-run tuna fishery in Mozambique and a gang of Bulgarian cocaine traffickers would strike terror and panic through the heart of most major banks.
Yet Zurich-headquartered Credit Suisse, which has already paid regulators $11bn in fines for consorting with the industry’s most dubious clients, continues to do business. Its recipe for survival? Restructuring its model – so-called “shape shifting” – to escape the next horror.
Hiving off investment banking, into a business called CS First Boston, recalls an earlier incarnation as CSFB. Under the latest plan, Credit Suisse will focus on providing a “full-service” operation to the domestic market, no longer competing with bulge bracket investment banks. Not only has the bank changed chairmen and its chief executive during the last year, it has also brought in Saudi National Bank as a 9.9 per cent investor.
Emerging from the latest series of debacles, the new-look Credit Suisse has moved so far from the ‘one-bank’ mantra of recent years that its management in Paradeplatz is now asking whether the entity could become so anorexic that it becomes a target for a predator to consume.
But while Credit Suisse’s announcements concentrate on structural change, bank insiders are conscious that a parallel, cultural transformation is equally important. “They brought in a lot of mercenaries who would bring their own culture with them, and that is what led them into trouble, because the attitude of investment bankers was that they were coming in for five or so years,” says Vadim Benyatov, who headed the bank’s European emerging markets team during the 1990s and was made redundant from Credit Suisse in 2015. “They planned to make a lot of money and then get the hell out.”
Wholesale change
Speaking at the beginning of December, the bank’s chairman, Axel Lehmann, admitted the key challenges he faced were “strategic redirection, repositioning and a cultural change”.
Part of this repositioning involves replacing an investment banking mentality with a core focus on wealth management services for entrepreneurs, said Mr Lehmann during a ‘fireside chat’ at the FT’s Global Banking Summit in London. “We are really driving from the top to the bottom a cultural change,” he said, emphasising that all employees are now put through a “comprehensive training programme” focusing on “risk culture and risk management”.
“Massive outflows” of SFr63.5bn ($68bn) from wealth management clients were influenced by negative publicity, especially on social media. “Very few clients are leaving,” said Mr Lehmann, insisting private clients are shifting part of their wealth to other firms. “That money will one day, at least in part, come back. Clients still want us, they are still with us,” attracted not by products, but “solutions” combining advisory expertise with knowhow around wealth management and capital markets.
The bank’s private wealth department boasted SFr1.4tn ($1.49tn) in assets under management in September 2022, the second largest of any bank, after UBS, outside the US. But this number has declined following the recent surge in withdrawals.
The task of rebuilding this client confidence and brand reputation represent a key challenge. “They need to bring in new assets, hire brand consultants and clean the tarnish off the name,” using recruiters to hire top quality wealth managers, says Kim Cornwall, a private banking veteran and training consultant to wealth managers. “They can still do it, because they know wealth management inside out, they have been doing it for years and it is their core business.”
But other consultants point to elevated risks associated with lending and regulation, with extra resources and expensive new staff needed in compliance and anti-money laundering (AML) units, in what is now a “tricky business” to operate in.
Recent losses
These challenges are highlighted by the colourful narrative around recent losses. Credit Suisse continues to seek recovery of almost $2.5bn from funds holding Greensill-linked investments and had to ‘gate’ four funds in its mission to recover a total of $10bn. “I think we are doing quite well, we have recovered around $7.3bn,” says a spokesman.
The handling of an investment in Archegos Capital Management, which failed in March 2021, costing the bank $5.5bn, was also a concern. An independent report commissioned from law firm Paul, Weiss, Rifkind, Wharton & Garrison, concluded Credit Suisse had a “lackadaisical attitude towards risk” and “failed at multiple junctures to take decisive and urgent action”.
This scandal, vowed the bank, would be a “turning point” for its risk management approach. The bank blames “institutional problems” leading to control issues for both Greensill and Archegos, while admitting “the profit imperative probably came into play as well”.
Two “rotten apples” were blamed by the bank when bribery was suspected in the granting of a loan to a state-owned tuna-harvesting company in Mozambique. A UK Financial Conduct Authority (FCA) investigation concluded the bank was aware there was a risk of corruption of government officials in Mozambique, with the projects “not subject to public scrutiny or formal procurement processes”.
“Time and again there was insufficient challenge within Credit Suisse, or scrutiny and inquiry in the face of important risk factors and warnings,” reads the regulator’s report. The bank paid $275m to US regulators and £147m ($181m) to the FCA to settle the case. A bank spokesman referred to two “rogue operators” who “figured out how they could beat the system for the purposes of self-enrichment”.
Governance issues
Money laundering has also been an issue, exposed in a report from the Swiss Financial Market Supervisory Authority, revealing how Patrice Lescaudron, a manager in Credit Suisse’s high net worth private banking unit covering Russian clients, breached internal procedures. The bank has accepted responsibility for neglecting AML procedures. Mr Lescaudron ended up committing suicide.
“Governance issues at Credit Suisse have repeated themselves over the past years, whether they relate to AML compliance or to other topics such as the surveillance scandal of Iqbal Khan,” said Vincent Kaufmann, chief executive of Ethos, an ethical investment manager in Geneva, as reported by Reuters in February 2021.
Mr Khan was a senior Credit Suisse manager, who was tailed by a private detective after moving to UBS in September 2019. The disclosure prompted the departure of then chief executive Tidjane Thiam, who denied all knowledge of the detective’s activities.
The bank’s conviction in a Swiss court in June 2022 for facilitating the laundering of drug-related assets belonging to a Bulgarian wrestler between 2004 and 2008 compounded concerns over compliance.
In convicting the bank, the Swiss federal court concluded: “The court found deficiencies within the bank during the period in question both with regard to the management of client relations with the criminal organisation, as well as with regard to the monitoring of the implementation of anti-money laundering rules by management, the legal service and the compliance department.”
Fighting on
While the blows from regulators, law enforcement and even damning messages on social media, keep raining down on Credit Suisse, the bank stays stoical. “The reputation has had a knock, but is it holed below the waterline? I completely don’t think so, and I think we will be able to rebuild,” says a spokesman.
Failure to listen to compliance and risk managers is a repeated refrain of every investigation into recent scandals. Legalistic compliance systems favoured by the Swiss were found inadequate, while others blame “arrogance” for some of the woes.
The tone adopted in Zurich these days is humbler than in previous eras. “We let people down, effectively, we need to win them back, and that is what the new plan seeks to do,” says the spokesman, who estimates the new strategy will bear fruit after three years.
But it is difficult to see how the bank will hire new advisers and compliance specialists, as current plans involve cutting relationship managers in the private wealth area to achieve a 20 per cent cut in the bank’s overall size. Credit Suisse plans to slim down its 52,000-person payroll by 9000.
Most agree rebuilding will require a much more prominent role for compliance officers, who have been overlooked and routinely snubbed by the business arm of the operation, says one former investigator, hired to probe problems with the bank’s culture.
“Compliance was treated as a cost that had to be borne, but then ignored as a constraint on the real business, which was aggressive investment banking,” says the former investigator.
There is little doubt the latest shape shift of Credit Suisse will have to be very robust and dramatic to weather the storm it has brought on itself. The bank’s goal – resuming the upward trajectory of earlier years, where it was on level-pegging with UBS – seems an ever more distant one.
