The lack of risk escalation led to Credit Suisse's failure to manage Archegos default, not any risk systems or controls.

An independent investigation of the events around the default of Credit Suisse client Archegos commissioned by the bank's board of directors said there was a failure to effectively manage and escalate risks in the prime services business by both the first and second lines of defense.

Importantly, the bank also relayed that risk control architecture and processes were not lacking and that existing risk systems did not fail to operate sufficiently in identifying critical risks and other related concerns.

Not High Priority

It also said that limits were also not properly managed by both lines of defense. Supervisory responsibilities in the investment bank and the risk function were also insufficient.

As a result, efforts to mitigate the risks, including dynamically margining the positions, were not given a high priority. The findings were disclosed alongside second-quarter results, which showed Credit Suisse's scarring from the family office-hedge fund.

No Ill Intent

The bank said that there was no ill intent in any internal conduct related to the client. The internal review was conducted by expert advisors at the direction of the board and Paul, Weiss, Rifkind, Wharton & Garrison LLP, an external law firm.

More than 80 interviews were conducted with current and former Credit Suisse employees and more than 10 million documents and other data collected.

Q2 Provision, Clawbacks

 The second quarter 2021 provision for credit losses for Archegos totalled slightly more than $650 million and followed the $4.8 billion provision in the first quarter. Most of the losses in the second quarter were a result of market movements when it closing out the hedge fund's positions.

As a result, risk-weighted assets and leverage exposure was cut by $20.4 billion and $41.5 billion respectively while the prime services business was substantially restructured.

Following the findings of the investigation, $70 million in previous compensation grants will be recovered from individuals by malus and clawback provisions.

«Decisive Action Taken»

Credit Suisse chairman António Horta-Osório said that decisive actions have been taken to strengthen the risk framework and learn the right lessons.

«We are committed to developing a culture of personal responsibility and accountability, where employees are, at heart, risk managers; know exactly what they must do; escalate any concerns; and are responsible for their actions,» he said.

Key Recommendations Implemented

Credit Suisse has already implemented a number of key recommendations from the report, including several changes in the investment bank's management and prime services and it has recruited additional risk specialists.

It has also reviewed all large group-wide exposures and revised controls on limits and procedural escalation requirements. It reviewed and upgraded risk-governance bodies and reduced risk appetite across Credit Suisse, with additional requirements now needed for material transactions.

In the prime services business, margin requirements have been increased and hedge funds have been moved to a dynamic margining system while «double-hatted» roles are being reviewed.

Wildermuth Appointed New CRO

Earlier this week, Credit Suisse announced the appointment of David Wildermuth as the new chief risk officer. He will join the bank from Goldman Sachs and is expected to start in early 2022. Until then, Joachim Oechslin will continue as ad interim chief risk officer. 

Actions Taken Against 23 Individuals

As a result of the investigation, actions have been taken against 23 individuals, with nine being terminated.