Reforms Made At Credit Suisse Bank Finance Essay - Free Essay Example

As we have seen the subprime crisis was in some part caused by the management failings of major investment banks. Several of these banks paid the price through collapse, having to merger with other banks or accept support from Government. Some investment banks however such as Credit Suisse have come out the other side of the crisis in a stronger position than they entered it. In this section well look at how Credit Suisse behaved pre-crisis, during the crisis and post-crisis and why it faired better than most. Whilst most would have recognised in 2006 that the markets were heating up, that competitors were doing more and more business, markets were becoming more and more liquid, moving more and more quickly. Management at Credit Suisse were also seeing warning signs, they were noticing the lower market returns for risk taking, they were seeing spreads compress, and watching revenues remain strong based on ever increasing volumes. The Risk department at Credit Suisse were also noticing that VaR was declining, especially in fixed income, which might lead you to take more risk, however Credit Suisse had developed other tools within their Risk Department that enabled them to take a more conservative position. Along with pulling back from sub-prime CDOs the bank made another major strategic change, which it announced in the second quarter of 2007. Thi s strategy was to reduce its proprietary trading, and focus instead on increasing flow trading, which is essentially a focus on clients and looking to make money through the volume. Brady Dougan, the CEO of Credit Suisse explained, It has been accepted wisdom in the industry for the past 10 years that the easiest way to make money has been proprietary trading and deploying your own capital, with the client-side of the business considered more challenging in terms of trying to make a decent return, but we believe that if we can run a business that is extremely client-focused and which provides value for our clients then that will create superior returns and lower volatility in our returns. It will also differentiate us from the rest of the industry. This move away from using the banks capital to generate profits also helped to stand it in good stead during and post the GFC. The below figure shows that Credit Suisse went in to the GFC with the largest capital strength of its peers, this was helped by the fact that it, like UBS has a successful Private Banking division which looks after funds for wealthy individuals. It was able to make it through the crisis without taking any government assistance, increasing its tier 1 ratio to 16.3% in 2009. Increasing capital requirements in financial institutions has been muted as a one of the takeaways from the GFC, and even before the GFC capital requirements were a part of BASEL II, however many argue that holding capital is a waste and prevents banks from generating profits. Credit Suisse has throughout 2009 and in to 2010, been able to hold perhaps the highest capital ratio of its peers, whilst at the same time generate a return on equity as good or better than its peer group. The latest results, 2010, Q1, showed Credit Suisse generating a net income of CHF 2.1 billion, with an industry leading return on equity of 22.3% and a tier 1 ratio of 16.4%. So it would seem that Credit Suisse management have chosen a good strategy, for the time being at least. Compensation It appears that the highest profile areas of concerns about the banks within the media, the public and from Governments, has been around the compensation paid to bankers. Again this was discussed in more detail earlier in this essay, its worth noting how Credit Suisse has behaved and reacted in this area. Credit Suisse has led the industry in reforms of the compensation model, in December 2008, it introduced a bonus system in which senior investment banking employees received part of their comp for 2008 in toxic assets. Bonus packages were made up of three elements. The first was cash, which was subject to clawback. The second was deferred stock or other instruments whose performance was related to CS stock. The third was the distribution of units that were linked to the market value of illiquid assets stuck on the banks balance sheet. (1) This system based on toxic assets has recently paid out, and generated very large payments to those senior staff on the scheme, as the toxic assets had greatly increased in value, though media coverage of the large bonuses was not a problem, possibly due to the success of the scheme in that it was linked to the success of the toxic assets and the business over a longer period of time. At the end of 2009, Credit Suisse implemented further changes to its compensation structure aimed to be consistent with the best practices announced by the G-20. Brady Dougan described the key elements of the new plan for Managing Directors and Directors: The key elements of the new plan for Managing Directors and Directors are: first, that an increased proportion of compensation will be paid as base salary beginning in 2010, and second, that discretionary year-end variable compensation will now be awarded in three parts. The first part is the cash element, which will not be subject to conditions after payment. Its percentage of the total variable award will be determined by a table. The second and third parts will be deferred, will gene rally vest over three to four years and will be divided equally between Scaled Incentive Share Units à ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ­ a new version of our existing ISUs à ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ­ and the Adjustable Performance Plan. The Adjustable Performance Plan is a new cash-based award which will earn a return equal to Credit Suisses return on equity in profitable environments but will have a mechanism which will adjust any unvested awards downward if a business area is loss-making. (2) So in summary, Credit Suisse has successfully changed its business model, changed its compensation model, and maintained its emphasis on risk management, to come through the crisis in a very favourable position and show leadership in the area of reforms that are being called for by the Governments, media and public around the world.