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Anyone doing a banking apprenticeship learns the economics of the finance industry early on:
1. The intermediation of money, that is, the provision of capital and credit.
2. Money transfer, that is, the guarantee of (electronic) payment transactions.
3. The custody and investment of money, that is, asset management.
So far the theory. However, in view of the current events around Credit Suisse (CS), the question arises: To what extent have the big banks with their business models deviated from these basic tasks?
The CS threatens billions of dollars in losses. Some of his elaborately improvised financial constructions have proven, once again, to be unsustainable.
First, the so-called CS supply chain finance funds were fatal. They were created in close collaboration with Australian banker Lex Greensill (44). His finance company Greensill Capital purchased outstanding invoices from suppliers around the world, converted them into securities, and pools them into funds.
CS touted these funds as “low-risk investments” with “attractive returns” and encouraged super-rich clients to buy. According to “Finanz und Wirtschaft”, the big bank even made loans to some clients to put even more money in supply chain funds.
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The idea behind the construction: the funds are used to pay suppliers immediately, and not after a period of 60 or even 90 days, as is customary in many parts of the world. In exchange for direct payment, suppliers grant a price reduction of a small percentage. With this discount, Greensill, the fund and its shareholders get their return, provided the outstanding invoice is paid after the payment period expires.
“Until now, the global market potential for supply chain financing has remained largely untapped and could grow by 15 percent annually,” CS 2017 enthused in its customer magazine. And further: “Lex Greensill has opened a billion dollar market.”
But the risks were completely miscalculated. Too many outstanding invoices went unpaid after the payment period expired. Greensill also purchased open invoices from vendors that had not yet produced, sold, or delivered anything. The built-in insurance coverage turned out to be useless. The system collapsed.
Archego has made massive speculations
This week, CS’s next collapse followed: the bankruptcy of the US hedge fund Archegos.
In this case, CS’s business model is not that complex, but at least so questionable: CS – and other large banks – had given the finance company billions in loans so that it could put billions into certain developments of prices.
Since Archegos speculated a lot, the lending banks requested additional guarantees. But because the hedge fund was unable to bring them in, some banks began selling the shares deposited by Archegos to protect against credit losses. By doing so, they saved their skin, but exacerbated the problem for other creditors, including the CS. Switzerland’s second-largest bank is now threatened with billions of write-offs.
For Marc Chesney (61), professor of finance at the University of Zurich and author of the book “The permanent crisis”, the current cases show once again that parts of the financial sector tend to their basic economic tasks, at best , laterally.
Another proof of this is the volume of derivatives that are traded around the world. “Derivatives are actually a useful means for the real economy to hedge against risks. For example, a food company can hedge against rising wheat prices. “
Meanwhile, however, the volume of derivatives is many times greater than the overall economic output. “This reveals that the financial sector has decoupled from the real economy, and that the big banks are primarily concerned with making the biggest possible profit on such bets.”
The increase in equity is not high enough
In return, financial institutions assumed considerable risks, which in the case of banks like CS – still “too big to fail” – are ultimately borne by the taxpayer. Chesney: “Almost nothing has changed in this regard since the financial crisis. Banks have increased their own funds over the past decade, but given the risks they continue to take, this increase is not high enough. “
The financial scientist also criticizes that the regulation of so-called structured products is too lax. “In the end, often no one knows what is really being invested in and if construction is sustainable and useful for our society. Therefore, we should create a licensing body that verifies exactly this, similar to what Swissmedic does with pharmaceuticals. “
Meanwhile, the financial sector itself sees little need for action despite the CS debacle. “The role of banks as supporters of the real economy is as central today as ever,” says Michaela Reimann, director of communications for the Swiss Bankers Association. As proof of this, he cites the SME loan program during the Corona crisis.
Reimann justifies billions in equity loans for risky stock trading: “Lombard loans basically serve an economic purpose and help create jobs. Many of the Lombard loans are invested in business activities. “
Reimann, on the other hand, describes supply chain funds as “a very complex business model” but one that is also “business supportive.” Using this business model must, of course, follow all regulatory requirements.
A change of opinion is hardly expected
And what does Credit Suisse itself say on the question of whether its business models and financial products continue to pay off? “As a universal bank, we cover a wide variety of client needs, from managing accounts and payment transactions to corporate loans, asset management and solutions for professional investors. This also includes alternative investment solutions that professional investors use to diversify their portfolios. “
In other words: don’t expect a change of mind.
Published: 04/04/2021, 12:31 am
Last updated: 04.04.2021, 20 minutes ago
