With regards to the Archegos debacle, it is clear how downright negligent Credit Suisse's top management was until recently. The shortcomings are serious and Finma has ordered far-reaching measures that apply to both the bank and its legal successor, UBS.

The multi-billion dollar debacle with the US hedge fund Archegos Capital Management that put Credit Suisse in dire straits in 2021, is now ending with hefty fines and a harsh reprimand from regulators, including the Swiss Financial Market Supervisory Authority (Finma), which has identified serious deficiencies at in the past.

Corrective measures have been ordered and aimed at both Credit Suisse and its legal successor UBS, according to a statement.

Double Fines, Targeted Banker

Following coordinated enforcement proceedings with Finma, the US Federal Reserve and the UK Prudential Regulation Authority have also issued a $269 million and 87 million British pound ($119 million) fine, respectively, against Credit Suisse. This will result in an extra provision to be reported at Credit Suisse, which will also be accounted for at UBS as part of the acquisition.

In addition, the Fed and Finma have also ordered the bank to undergo far-reaching changes related to credit, liquidity, non-financial risk management and constant monitoring of such measures. Separately, Finma said that Credit Suisse had seriously violated financial market law via its relationship with Archegos and has also opened enforcement proceedings against a former executive at the bank, without naming the individual.

In its proceedings, Finma identified a handful of shortcomings at the fallen Swiss lender.

1. Excessive Position and Risk

As a result of its relationship with Archegos, Credit Suisse had amassed a position totalling $24 billion, as of March 2021. This was worth four times the position of the next largest hedge fund client and more than half of the equity of the bank itself.

«The bank was unable to adequately manage the risks associated with this position,» Finma said.

2. No Senior Involvement

Interestingly, members of Credit Suisse’s executive board were not informed about the facts in this major fiasco, according to Finma’s findings, adding that there was «no requirement that responsible executive board members address significant and risky business relationships on their own initiative as standard».

3. Inadequate Response to Breaches

On monitoring risks at Credit Suisse, Finma said that it was regularly indicated that the Archegos relationship had exceeded limits and was exposed to potential losses, though the response was inadequate.

«[T]he employees responsible behaved in favor of the customer. Exceedances were insufficiently complained about,» the regulator outlined.

«On the one hand, the bank made additional demands on Archegos that were far too low. On the other hand, exceeded limits were repeatedly simply increased. Although the overruns were reduced, the actual risk of loss increased.

4. Concentrated Risks

Instead of seeking diversification, Credit Suisse built up concentrated risk with only a few issuers as a hedge, which in some cases led it to amassing signifiant market share.

«Overall, the bank incurred enormous and concentrated risks of loss, which materialized in the subsequent fire sale. The bank took completely insufficient account of the fact that the collateral could not fulfil its purpose in an emergency because it was not diversified,» Finma said.

5. Pre-Collapse Payout

Two weeks before Archegos collapsed, its positions still had high market value and it, therefore, demanded that Credit Suisse pay out $2.4 billion. The bank paid this amount and, according to the statement, this was based on a contract between the two which certain Credit Suisse employees had assumed was obligatory.

«However, there are no indications that the bank actually examined the possibility internally of not having to make these payments or considered suspending them until additional collateral was provided or offsetting them against such collateral in order to minimize its own risks,» Finma explained.

Overall, Finma deemed that there was insufficient organization and risk management at Credit Suisse. It underlined that the bank was «unable to adequately identify, limit and monitor the significant risks associated with Archegos» and thus «seriously and systematically violated the organizational requirements under banking law».

Corrective Measures

As a result of the events, Finma is demanding that UBS, as the legal successor to Credit Suisse, apply its own restrictions throughout the financial group on positions related to individual clients. It specifically ordered for a change in the bank’s compensation system to include a bonus allocation criteria that accounts for risk appetite and to make this change legally binding.

«Therefore, for employees with particular risk exposure, a control function must assess and record the risks taken before the bonus is determined,» Finma said.

«UBS will implement its operational and risk management discipline and its culture across the combined organization. It has already begun implementing its risk framework, including actions addressing these regulatory findings, across Credit Suisse,» the Swiss bank responded in its own statement.