The Swiss bank's initial details on the Archegos fiasco are not quelling market speculation. A deeper look at the role of Credit Suisse's risk management is warranted, finews.asia's editor-at-large Andrew Isbester writes.
After going out on a limb for risk management in the Archegos debacle last week, I am going to split hairs. I know it beggars belief and conventional wisdom, but I do not think the main problem is risk management.
In an interview, CEO Thomas Gottstein seems to indicate that there was a conflict of interest between the investment bank and other parts of the bank, in my view, it was likely wealth management. It also seems the bank only became fully aware of the conflicts in hindsight.
Biggest Business Wins
It also seems internal compliance was not fully respected, particularly when such a conflict reached the risk committee level. «When it's done right, we know more about the client's financial strength and actions. But we will look at that in the review: are there negative incentives to make some decisions,» Gottstein said. Clearly, there are.
Say you bank a family office that is doing complex, potentially market-moving financial transactions that may even spark material losses. Should your investment bank be in a position where it is ever holding any of those positions in inventory, as collateral, as a tranche or part of some securitized asset, as your wealth management business oversees the private investments of the key family member at the same time?
Or that one a family member or even a distant relative – and where the team of individuals managing the relationship would do anything to preserve the relationship bar nothing, given that contacts to billionaires are not all that easy to come by?
Facing the Firing Squad
Who wins out at the risk committee level? Risk – which is second-line and does not own the risk – the investment bank – or wealth management? I am guessing the largest and most important business, in this case, likely wealth management, probably wins the day.
Credit Suisse's management changes mean, at the highest executive level, it is directly tying the risk chief and the head of its investment bank departing. A cascade of changes at lower levels, including the head of equities trading, of prime service risk, and of credit risk at the investment bank demonstrates Credit Suisse is blaming risk management.
The final score is six risk departures versus two departures from the business, while management – which owns the risk more than anyone else – only misses out on their bonuses (meaning they get out of this with their hair tousled). Anyone in the client relationship teams simply need to keep their heads down and let it all pass.
Risk Leaders Hand Over
Meanwhile, shareholders are left bereft of two-thirds of their dividend and an expected share buyback. But why isn't this a pure risk management issue?
Risk managers can set limits for counterparty credit exposure, the framework, approve the exposures, even comfort the trades, and send out the margin calls. Ultimately though it is up to the business to figure out what to do as they own the risk, and should bear the brunt of the responsibility.
Why was Credit Suisse slower than Goldman Sachs, Morgan Stanley, and Nomura in getting rid of the positions and exposures? That could not have been due to the risk managers as they are not usually shouting prices into phones or sitting on the backs of traders helping them to slam down the return key to execute trades.
Dread of Assessment
Credit Suisse's risk and compliance framework looks pretty much like all the other banks out there: three lines, the section on culture and governance, and even a position and client risk (PCR) committee that seems veritably made for these situations. The Swiss bank has a framework that defines risk capacity, appetite, and profile, as everyone else does and which is usually agreed with the local regulator.
So why didn't it protect Credit Suisse from the Archegos hit, and could it happen again? Most observers leaped to the conclusion that this responsibility should lie with risk management. But I would argue instead, after just throwing the business under the bus, go ahead and throw them under the bus again.
Risk management, whether you are in financial crime, counterparty risk or the plainest vanilla credit risk job, depends on the business for regular, periodic detailed risk assessment of their activities. If these are not completed correctly or fully, boundlessly tiresome though they are, nothing will change because – in defense of that downtrodden and overwrought risk manager – they are not, as far as I know, telepathic.
Angry Bonus-Hungry
I do not know what the risk assessment for the prime services or hedge fund business looked like, but I think we can safely assume it did not mention the possibility of a full fire-sale of the client’s positions in distressed markets that were also held by the bank on inventory for irrationally low prices, hours and even days after everyone else had sold. They would be too rationale for that.
Lastly, CEO Gottstein is reportedly facing off against a horde of angry managing directors questioning the risk profile of Credit Suisse's prime services. It never fails to draw a wry smile on my face at how they seem to always question these things after the fact, never before.
