will take a $2.65 billion hit to earnings and post it's first quarterly loss since 2003 due, to no small part, to deliberate mispricing
of asset backed securities
by several traders operating at all levels of seniority across the 143 year old institution.
Yesterday Credit Suisse was the goss on trading desks during the day and late into the night at pubs. And, of course, parallels were raised between this event and the collapse of Barings Bank in 1995
, singlehandedly brought about by one Nick Leeson
So is this another Barings, will Credit Suisse also collapse? Of course in time Credit Suisse will
more than likely cease to exist, but odds are this single event won't shut it down, even though much larger than the Barings fraud, and (apparently) much more pervasive.
Why you ask? What's different this time? Very reasonable question. Well, the folks responsible for regulating the global financial system
(to the extent it can
be regulated that is) are well aware of risk. For example, the risks of new instruments operating at unprecedented scales of deployment, leverage and complexity. Or the risk of highly interconnected financial institutions, each dependent to some degree upon the stability of the other. But the regulators are also concerned, to no small extent, with what perhaps can be considered, the oldest risk - moral hazard
To deal with this (and other, related risks) the Basel II Capital Accord
, effective January 1st 2008, finally integrated Operational Risk
into the larger regulatory umbrella.
Earlier versions of the Basel Accord dealt with Market Risk
, or the possible change in value of assets held by a bank due to market forces
, and Credit Risk
, or the possible loss a bank might face due to a counterpart defaulting.
The Basel Accord requires banks to act prudently, and set aside money - Economic Capital
- sufficient to cover both expected
losses caused by the aforementioned risks.
And this time it is
indeed, different. Unlike 1995, now banks are required so set aside money to cover, cushion the blow, if you will, of losses directly related to the operation
of the institution; operational risk, by definition.
The part of the Basel II Accord dealing with Operational Risk identifies seven different event types
; effectively how losses can be realised due to the operation
of a financial institution. Banks are required to forecast both the frequency and impact of all such events, and set aside adequate capital such that the stability of the institution - as well as the wider global financial system - won't be threatened, should the worst happen.
As it would seem this event slots rather nicely into the Basel II definition of internal fraud
, or "Loss due to acts of a type intended to defraud,..."
, one can assume that adequate capital is indeed available to compensate for this loss.
So another Barings? In a single word: no. Both had fraud and personal gain as the primary drivers of the bank's loss. And perhaps worse, the Credit Suisse incident seemed to be the work of an organised group
of several traders.
But it was different this time due to two factors, both attributable to Basel II: first, banks and other financial institutions are required
to first forecast, then monitor and report such losses (while there still may be dirty laundry in the boys room it's harder to hide as the stink gives it away). And secondly, they are required
to set aside capital, in advance, to cover forecasted losses.
Yes, I admit it. This is Newsfilter, but its Newsfilter 2.0! And Newsfilter 2.0 both educates and pre-empts, lest others seize this event as further "evidence" that the global financial system is out of control