The financial regulator blames remuneration systems for the downfall of Credit Suisse in its new report. Bankers’ bonuses failed to prevent losses or encourage good behavior at the institution.
The bank that once paid its former CEO Brady Dougan a record bonus of 70.9 million Swiss francs ($82.2 million) had to collapse before these excesses could be addressed.
The Swiss Financial Market Supervisory Authority (Finma) made it clear on Thursday for once and for all in its detailed report on the Credit Suisse crisis that the major bank’s downfall was primarily due to governance issues.
Are All Options Exhausted?
In the report, the authority takes the view that it has exhausted all options in its supervision of Credit Suisse itself; the fact that the major bank eventually went under may be blamed, if at all, on the fact that Finma lacked further powers – such as a «management regime» for intervening at top cadre level.
This view contrasts with reports such as those from news agency «Reuters,» which indicate that Finma, the federal government, and the National Bank were at odds in dealing with Credit Suisse and hesitant in dealing with the steadily deteriorating situation. Finma has also come under worldwide criticism for its directive to write off around 16 billion francs in mandatory convertible bonds (AT-1) at the major bank.
All Talk And No Substance
It is commendable that the authority has largely been transparent about its activities at Credit Suisse and clearly identified the intractable deficiencies in risk management and leadership at the second-largest Swiss bank. The (constantly changing) executive committees, Finma says, have been unable to comprehensively and permanently rectify the identified shortcomings since the financial crisis in 2008.
According to the report, the remuneration system also played a significant role in these shortcomings. Variable remuneration, i.e., banker bonuses, remained high even in years with large losses. The major shareholders barely exercised their influence on remuneration, according to the authority. And this was despite loud criticism at the annual general meetings.
Bonuses Like Fixed Salaries
Finma’s calculations for these flawed structures are impressive. Cumulatively, Credit Suisse generated a net loss of 2.1 billion francs over the previous ten financial years. But the total variable remuneration according to remuneration reports amounted to over 33 billion francs in the same period. Between 2015 and 2017 when losses were made, bonuses of over 3 billion francs were constantly granted.
Even in 2021, variable remuneration at Credit Suisse still amounted to over 2 billion francs despite the significant losses caused by the bankruptcy of U.S. financial firm Archegos.
«During these years, Credit Suisse paid out high sums of variable remuneration that essentially amounted to a fixed salary over time, creating incentives that mainly promoted short-term monetary profits at the expense of developing a healthy risk culture,» Finma concludes. Put differently, the bank’s executives and managers could rest assured that they would get their special compensation, regardless of business performance, while the shareholders bore the losses.
Hundreds of Millions Blocked
The supervisor had only a limited influence on the remuneration pool. But this changed in 2021 when Credit Suisse’s earnings situation began to structurally deteriorate. Under pressure from Finma, the bank reduced the planned bonus pool for that financial year from 2.5 to 2 billion francs. For 2022, the bank then reduced the bonuses from the planned 1.75 billion to 1 billion francs.
The bank considered this «the absolute minimum amount to protect the business franchise,» the report says.
To ensure the loyalty of senior management, a new bonus program called the «Strategic Delivery Program» was launched last year at Credit Suisse, which includes a gagging component and under which a total of 500 million francs would be paid out if certain strategic goals were met in the future. But as reported by finews.ch, Credit Suisse executives have still been leaving the bank in droves. The buyer, UBS, is reportedly trying to claw back bonuses from those executives that were already paid out. A legal wrangle is inevitable.
Complete Failure in Every Respect
Credit Suisse’s bonus programs must be seen as a complete failure in every respect. They did not increase the productivity of those who were favored, nor did they promote their integrity and good behavior. Since 2012, according to its statements, Finma has conducted 43 preliminary investigations for possible enforcement procedures against the major bank, issued nine reprimands, and filed 16 criminal charges. There were also 11 enforcement proceedings against the bank and three proceedings against natural persons.
According to statements made at the conference on Thursday, no professional bans were imposed during this period. However, the supervisory authority targeted top individuals at Credit Suisse with a total of eight enforcement proceedings, with three of those targeted since retiring from the regulated financial sector for life.
UBS Also Pays Homage to Banker Bonuses
What a surprise then that the supervisory authority now wants to see the requirements for remuneration systems spelled out at the legislative level. The supervisory authority also wants the green light to impose specific measures on remuneration in relation to banks. If legislators can be persuaded, the new UBS-Credit Suisse would immediately attract attention. Even UBS has always paid homage to banker bonuses based on the argument that an international bank must pay globally competitive salaries to attract the best talent.
Sergio Ermotti, the new old CEO of the Swiss mega bank, was the highest-paid bank CEO in Europe for several years during his first term at UBS.
