Post-mortem report on Credit Suisse lays out events leading to collapse

One of the world’s leading banks, Credit Suisse, failed amid a combination of poor strategic execution, repeated mistakes and misconduct, and a lack of accountability that ultimately produced a fatal loss of investor and client confidence, according to the Swiss Financial Market Supervisory Authority (FINMA).

The regulator published its post-mortem on the collapse of Credit Suisse, which led to its acquisition by rival UBS AG in March.

“The disappearance of one of Switzerland’s two large global banks was a traumatic event for the Swiss financial services sector,” the regulator said in the report.

It attributed the bank’s failure to a series of mistakes that undermined confidence and led to clients fleeing the bank to the point that it faced an imminent risk of insolvency in mid-March.

The regulator found that when Credit Suisse tried to shift strategy by scaling back its investment bank and focusing more on asset management in an effort to stabilize earnings, these strategic changes “were not implemented consistently. Earnings remained volatile both in the investment bank and in asset management.”

At the same time, it said that “recurrent scandals undermined the bank’s reputation, weighed on its results and resulted in clients, investors and the market losing faith in it.”

Most of these problems were underpinned by poor risk management, the regulator said. And shareholders did little to discipline the bank’s management: “Even in years where the bank reported large losses, the variable remuneration remained high.”

The large ongoing costs of its failed strategic shifts, sanctions for misconduct and operational losses also meant the bank repeatedly had to raise capital, the report said.

While Credit Suisse was able to meet its regulatory capital and liquidity requirements, the damage to investor confidence led to rapid outflows, which, coupled with a digital run on the bank, eventually resulted in its demise.

FINMA said that, long before the bank was in crisis, it took supervisory steps to try and address many of the issues with its governance, risk management and culture, but these measures were ineffective.

Since 2012, the regulator conducted 43 enforcement investigations involving Credit Suisse, issued nine reprimands, filed 16 criminal charges and completed 11 enforcement proceedings against the bank and three against individuals.

It also carried out 108 on-site supervisory reviews at the bank between 2018 and 2022, resulting in 382 compliance recommendations — including 113 that were flagged as high risk or critical.

“These figures and measures illustrate that FINMA exhausted its options and legal powers,” the report said.

As a result, the regulator called for stronger powers, including the ability to impose fines and publish enforcement actions, and tougher corporate governance rules. It also called for a stronger legal mandate that would enable it to “effectively intervene in remuneration systems.”

The regulator pledged to revise its supervisory approach in certain areas, too, and it recommended tougher capital rules and supervision.

“FINMA ordered far-reaching additional capital charges to counter the increased risks from Credit Suisse’s business activities,” it said. “In future, FINMA will analyze the risks involved in strategy implementation or an inadequate control environment and the resulting potential for losses by financial institutions even more systematically, and will impose and disclose additional capital charges if necessary.”

The regulator indicated it will revise its approach to recovery and resolution as well.

For instance, resolution plans will factor in the prospect of faster bank runs and more crisis scenarios, and recovery efforts will focus on ensuring that recovery plans can be implemented effectively, it said.

“We are committed to ensuring that supervisors hold even better cards. The specific case of Credit Suisse illustrates both the possibilities and the limits of supervision,” said Marlene Amstad, chair of FINMA’s board of directors, in a release.

“It is clear that the state of the Swiss financial centre in five or 10 years’ time will be largely determined by whether the legal basis for supervision is strengthened today.”