Credit Suisse expects its operational risk-weighted assets (RWAs) to rise by Sfr1 billion ($1.1 billion) by next March, as the bank digests a flurry of litigation provisions.

The increase – tentatively quantified by chief financial officer David Mathers on today’s (November 4) earnings call – would have inflated op RWAs by 14% as of end-September, to Sfr70.1 billion, the highest since the third quarter of 2019.

The bank, which has been embroiled in a series of governance scandals stemming from legacy conduct and recent dealings, booked Sfr564 million in litigation provisions between July and September.

It already took on Sfr6.7 billion in new op RWAs during the first half of the year, after increasing provisions for US misconduct allegations dating back to the global financial crisis. 

Op RWAs rose 1% over Q3, due to currency fluctuations. As of end-September, they accounted for just under one-fourth of the bank’s total Sfr278.1 billion RWAs, up from 24% at end-June and 20% at end-December 2020.

Who said what

“In respect of the litigation provisions [taken in Q3] … I would expect an increase in op risk RWAs, as it works its way through the system over the next couple of quarters, of around Sfr1 billion … I don’t have any more visibility at this point in terms of any other operational risk charges or moderated charges relating to the Archegos matter or, indeed, to the Greensill matter” – David Mathers, Credit Suisse CFO.

What is it?

Basel II rules lay out three methods by which banks can calculate their capital requirements for operational risk: the basic indicator approach; the standardised approach; and the advanced measurement approach (AMA).

The first two use bank data inputs and regulator-set formulae to generate the required capital, while the AMA allows banks to use their own models to produce the outputs, using internal loss data, external data, scenario analysis and business environment and internal control factors.

Under incoming Basel III rules, all banks will be required to shift to a revised standardised approach. Credit Suisse currently calculates all its op RWAs using the AMA.

Why it matters

Op risk can be as subtle and unstoppable as the sea tide, slowly submerging ever more of a bank’s capital reserves. And for Credit Suisse, the ghost of misconduct past keeps coming back.

Beyond the high-profile cases of the Greensill-backed investment funds’ collapse and the misselling of bonds at the expense of Mozambique’s state coffers, the bank is still dogged by allegations spanning a decade.

The Q3 financial report lists, among others: a civil action by the state of New Jersey over the misselling of subprime-backed securities, set to go to trial in September 2022; civil actions in California and New York over interbank rate manipulation; two pending cases linked to over-the-counter trading practices; and a lawsuit in Singapore by clients defrauded by a rogue wealth manager.

This is arguably par for the course for any global bank with huge investment banking and wealth management franchises. But for Credit Suisse in particular, the op RWA one-twos just keep coming, and risk diverting precious capital resources from new chairman António Horta-Osório’s sweeping restructuring plans.

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