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CS-Greensill: The Failure in Risk Management

Credit Suisse could have avoided the debacle with the Greensill Fund. But the big bank's risk management stood in its own way. Under the leadership of Lara Warner, this department worked in a highly contradictory manner. The need for explanation is growing.

Credit Suisse (CS) acted extremely cautiously in the Corona year 2020: In the first quarter, the big bank set up provisions for credit risks in the amount of over half a billion francs. As the corona pandemic continued, CS increased these provisions to CHF 1.1 billion by the end of the year.

CEO's caution Thomas Gottstein and the highest risk manager in the bank, Lara Warner, was well founded. The worldwide shutdown and lockdown due to the corona pandemic interrupted important supply chains in the global economic system, causing companies to run into liquidity bottlenecks.

Schoolbook here, failed there

The increase in the provisions for default risks at CS was carried out according to the textbook - the risk management functioned as it should.

It is all the less understandable why CS's risk management has failed so badly in its supply chain finance funds. The flow of money from which these funds draw their returns depends on the smooth functioning of such supply chains. CS risk management has thus worked very well on the same subject - credit risks in connection with supply chains - and failed catastrophically on the other.

CS should be able to explain why it set aside more than 1.1 billion francs as a safety buffer and at the same time massively increased its risks by increasing the investment volume of its supply chain funds from 7 to 10 billion francs during the pandemic year 2020 .

Overlooked lump risk

So far, the CS has not been able to do this. A review of the funds in early summer 2020 only resulted in the withdrawal of the Japanese Softbank from the funds. Softbank was an investor in Greensill Capital, with whom CS operated the funds, and an investor in companies that were financed through the funds.

Greensill's lump risk at GFG Alliance, the British-Indian entrepreneur's steel conglomerate Sanjeev Gupta was fed with the billions from the fund, CEO Gottstein and risk manager Warner escaped, as did the insufficient coverage of the credits and loans by the insurers.

Warnings ignored or overridden

It also remains unexplained why CS risk managers in London refused a bridging loan of $ 160 million to Greensill Capital last autumn - but the loan was approved by Warner in October.

The CS does not provide any explanation for the fact that it continued to actively promote the Greensill funds while it was already aware of a regulatory investigation by the Greensill Bank in Germany.

Everything under control

The risk management of a big bank is a huge task. At Warner, who has been Head of Risk and Compliance since last summer, everything comes together. Be it credit risks, cyber risks, money laundering risks, reputational risks or climate risks - Warner's department has to monitor, check and assess everything and derive actions for CS from this.

Risk management is correspondingly bloated and present within CS, both in terms of personnel and through monitoring systems, so that all processes and procedures remain under control.

Didn't know anything until the end?

With the supply chain finance funds and especially in the cooperation with Greensill Capital, Warner seems to have been blind in one eye. She approved the loan to Greensill in October, but claims to have had no knowledge until the last week of February that the insurance cover for the Greensill risks ended at the beginning of March.

Whereby blind is the wrong expression: Lex Greensill was not only connected to the investment bank of CS and its asset management through his company. According to the Anglo-Saxon media, he is also said to have been a private customer of the major Swiss bank. In this respect, the question arises as to how objectively risk management acted and decided.

With the separation of asset management and the use of Ulrich Körner as a cleaner it is not done.

Credit Suisse has a new President in António Horta-Osório. Can he turn it around?
  • Yes, he will completely rebuild Credit Suisse.
  • Yes, but it will take at least two years.
  • Yes, as soon as he has changed management.
  • The odds are 50 percent to 50 percent.
  • No, he will hardly be able to achieve anything.