Credit Suisse shareholders are fed up with Credit Suisse’s investment bank (IB). The IB has burned 5,259,000,000 francs in the last 21 months, that is, since the beginning of 2021. With several billion-dollar fiascos and numerous expensive lawsuits, the IB is a bottomless pit, dragging the bank into crimson numbers. However, with the planned restructuring of the bank, everything should get better. IB has been reduced and is largely outsourced.
For example, CS will sell a large portion of the business with securitized mortgage loans or credit card debt. On the other hand, it is outsourcing its capital and consulting business to a new company, hereinafter known as CS First Boston. And risky assets end up with a “bad bank” where they will eventually be liquidated.
Does Credit Suisse have to cover the subsidiary’s losses?
Shareholders should be happy with this step: in the future, the investment bank’s losses will no longer consume all profits from Swiss business and asset management. But does this still hold true if CS subsidiary First Boston continues to waste hundreds of millions each year? “Credit Suisse is not required to be liable for or indemnify subsidiaries,” says Peter V. Kunz (57), a banking expert and professor of law at the University of Bern.
However, there are certainly instances where a parent company guarantees liability on a contractual basis. This step can build trust with partners or customers. This happens over and over again, Kunz says: “However, Credit Suisse has not communicated anything at this point.”
And then there will be an exceptional case: if Credit Suisse’s behavior raises certain expectations in terms of responsibility and then disappoints them. But that never happens in practice, emphasizes Kunz.
CS can’t get the head out of the slingshot
In “Bad Bank” the situation is completely different. Kunz is convinced that if ongoing litigation or liability risks are also outsourced, it must be accompanied by the parent company’s contractual safeguards: “This does not help much from a legal standpoint. In a case, plaintiffs side-step risks to deflect the bank’s liability risks He can object that he parked in the establishment,” he says.
If First Boston scores badly, CS shareholders won’t be able to get away without any liability: because then the First Boston holding, owned by Credit Suisse, will fall in value and the bank will have to make painful value adjustments.