Staggering monetary penalties have been imposed on the renowned Swiss banking institution, Credit Suisse, following a cataclysmic financial debacle tied to the collapse of Archegos Capital.
The regulatory watchdogs from both the U.S. and the UK have dealt out fines totalling a whopping $388 million, citing “significant failures in risk management and governance.”
The aftermath of this crisis has rattled the bank, leading to a crippling $5.5 billion trading loss and contributing to the bank’s eventual downfall.
Rough seas for Credit Suisse
The regulatory gauntlet fell hard on Credit Suisse, the chief offender in the Archegos disaster. The US Federal Reserve delivered a scathing $269 million penalty due to the bank’s “unsafe and unsound counterparty credit risk management practices.”
Simultaneously, the UK Prudential Regulation Authority levied a record £87 million fine. The resultant tumult rocked the foundations of the venerable institution, leading to its eventual takeover by rival UBS, facilitated by the Swiss government.
Meanwhile, the Swiss supervisor Finma declared that Credit Suisse had “seriously and systematically violated financial market law”, calling for remedial actions on UBS, the new parent.
While Finma is presently engaged in proceedings against a former employee, it doesn’t have the jurisdiction to fine financial establishments.
The Archegos catastrophe: A study in mismanagement
A series of missteps led to the biggest trading hit in Credit Suisse’s 167-year history when Archegos went belly-up in March 2021.
The bank bore the brunt of the damage, accounting for more than half of the total $10 billion lost by international banks that had offered the family office prime broking services. The scale of the failure cast a shadow over the industry, with UBS recording an $861 million loss.
The management of Archegos under Bill Hwang turned into a high-stakes game of risky wagers on US and Chinese stocks, heavily fuelled by borrowed funds. This house of cards crumbled when the company value nosedived, triggering a wave of margin calls that Archegos couldn’t cover.
The bank’s egregious errors, as pinpointed by the three supervisors, ranged from offering half of the bank’s equity to a single counterparty to a noticeable absence of board-level oversight.
Further adding to the list were insufficiently experienced staff, a disregard for risk limit breaches, and misguided loyalty towards the client over the firm. Adding insult to injury was the ill-advised move of repaying $2.4 billion to Archegos just two weeks before its implosion.
The aftermath of the debacle has seen the Fed ordering UBS’s board to submit a plan within 120 days to establish a “remediation office” to bolster oversight of its US operations.
Credit Suisse’s fall from grace will go down in the annals of banking history as a cautionary tale of mismanagement and failure to mitigate risks. The Archegos episode is only the tip of the iceberg.
From lawsuits over its association with the defunct Greensill Capital, a US tax evasion case, to private litigation over US residential mortgage-backed securities, UBS has had to shoulder the burden of Credit Suisse’s past missteps.
With an audacious $388 million fine for Credit Suisse, the regulators have made it abundantly clear that banking institutions are not above the law.
