Who Pays if Credit Suisse Collapses? the Financial Fallout
On 27 October 2022, Credit Suisse will unveil its much-anticipated overhaul strategy and third quarter results. The Swiss bank has been battling rumours of a looming collapse since the beginning of October, when the bank’s shares fell by nearly 6%; its stock price has decreased by more than half since the beginning of 2022.
Further aggravating investor anxiety, the interest rate for Credit Suisse’s five-year credit default swap (CDS) – an insurance against the risk of investments that allows an investor to swap or offset their credit risk with that of another investor – spiked by six basis points to 2.47% on 30 September, the highest level in ten years.
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Ahead of the strategy announcement, the only reassurances from Ulrich Körner – the CEO appointed in July 2022 – have come in the form of a leaked internal memo which urged employees not to confuse “day-to-day” stock price performance with the banks “strong capital base and liquidity position”.
Various news outlets have estimated that a capital injection between $4bn and $9bn is needed to support the restructuring. It’s also been widely speculated that the bank is selling off significant units of the business – the securitised products business, the residential mortgages division and commercial real estate, to name a few.
Despite the bank’s alleged fire-sale, there is scepticism about its potential collapse. Many experts have blamed social media hysteria and anxious investors for the heightened perceived risk.
Scepticism aside, the anxiety felt from investors is very real and for them, this strategy announcement carries weight. Whether a collapse is indeed imminent remains to be seen, but the question remains, who will pay if Credit Suisse collapses?
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By GlobalDataSwiss subsidiaries in the firing line?
According to the GlobalData Multinational Companies Database, Credit Suisse currently has 88 global subsidiaries (companies in which Credit Suisse has a stake larger than 50%). Switzerland is the main location for its subsidiaries with 16, while the US is a close second with 15.
Although the architecture of being a subsidiary means that the potential collapse of Credit Suisse would not necessarily spell the end for these companies – there would, at the very least, be adjustments needed.
The large majority of its subsidiaries are Credit Suisse branded entities such as Credit Suisse Founder Securities Ltd in China and Banco Credit Suisse in Mexico and Brazil. At the very least, if these companies were to remain following a collapse, they would still likely have to undertake the costly process of rebranding.
Corporate Centre losses
In its accounts, Credit Suisse splits out its assets located in Switzerland and others held in its "Corporate Center" from those recorded to be located in the main regions of EMEA, Americas and Asia Pacific.
Switzerland includes the group's headquarters and its largest number of subsidiaries, and as such accounts for a large proportion of the bank's revenues. The Corporate Center is the arm of Credit Suisse that holds the "asset resolution unit", a division that focuses on selling unwanted assets. It also acts as an umbrella over region-less corporate actions such as legal costs and financing requirements.
According to the 2021 annual report of Credit Suisse, the Americas recorded the highest revenues of any region for the previous financial year with $7.2bn, followed by Switzerland with $6.6bn.
Corporate Center was the only “region” that reported losses. The report outlines a legacy litigation settlement brought by SWM in March 2022 as part of the reason for this, stating: "[Credit Suisse] increased its 2021 litigation provision by $77m in the Corporate Centre and decreased its estimate of the aggregate range of reasonably possible losses not covered by existing provisions...”
Alongside the losses sectioned to the Corporate Center, there were other regions that saw a decrease between 2020 and 2021. EMEA was down by 2.77% and Asia Pacific was down by 0.19%. The other regions saw a moderate increase during the same period of between 1.3% and 2.5%.
For foreign direct investment (FDI), the majority of Credit Suisse’s activity falls under the sub-sector of investment banking projects.
The GlobalData Multinational Companies Database tracked 13 FDI projects under Credit Suisse between 2019 and 2022. There was no clear regional leader for these with India, Qatar and the US tying for top position with two projects each.
Although a Credit Suisse collapse wouldn't make a significant or specific dent in regional FDI, the potential loss of access to investment support at one of the banks global branches or international bank accounts, either personal or business, could potentially harm companies that are already using the banks services as part of their FDI operations.
The chopping block
When looking at Credit Suisse's total headcount, global employees totalled 66,540 at the end of 2021, which was an increase of 7.4% since the close of 2020. However, Corporate Center once again accounted for the highest losses with a decrease of 13.6% during the same time period, going from 1,250 employees to 1,080.
Credit Suisse recorded the highest level of growth in outsourced roles, contractors and consultants between 2020 and 2021 at 24.4%, from 13,210 to 16,430. This indicates that the bank is employing less long-term inhouse employees, preferring instead contracts with less commitment.
If a collapse were to occur, a total of 66,540 employees could lose their jobs, with 50,110 of these being in-house roles.
Credit Suisse is considered "too big to fail" as a systemically important financial institution integral to the economies it serves. A high number of employees, subsidiaries and FDI projects are dependent on the continuation and recovery of Credit Suisse, so whilst the share price may still be low, the stakes remain high.
