Brady Dougan, Credit Suisse’s chief executive, is a member of an unintentionally exclusive club. Alongside Jamie Dimon at JPMorgan and Lloyd Blankfein at Goldman Sachs, he is one of only three global banking chiefs who have stayed at the helm throughout the financial storms of the past five years.
The environment in which they must now navigate their banks, however, has completely changed. Hit by a wave of regulations introduced following the financial crisis, banking has become a world of higher capital requirements and lower returns.
“Our view has been that there will be some parts of the system where it won’t be economic for anyone on the regulated side to do them as they are simply too expensive,” Mr Dougan says in a phone interview from the bank’s New York office, where the American-born head of the Swiss bank spends about one day a week.
As a result of the re-regulation, Credit Suisse, like most of its rivals, has shut down specific business lines in the investment bank, such as proprietary trading and longer-dated unsecured rates, strengthened its equity capital base, cut costs and slashed the amount of risk-weighted capital allocated to the investment bank.
Similar cutbacks and capital build-ups by Credit Suisse’s peers, as well as a new framework for the recovery and winding down of failing banks without taxpayers’ support, have stabilised the sector, Mr Dougan believes.
However, the 54-year-old investment banker, who has been with Credit Suisse for 23 years, warns not to confuse sounder banks with a safer financial system. “Some amount of risk has gone away because some activities are not being undertaken any more. But also a fair amount of risk has been transferred to other parts of the system, areas like shadow banking, insurance companies, pension funds or retail investors,” he says.
Mr Dougan also believes banks need to do more to build up liquidity, given that such a lack of easily sellable assets was one of the main causes of banking collapses in 2008. And he is concerned that banks or regulators might use a requirement to achieve a 3 per cent ratio of equity to overall assets as a pretext to slow down efforts to squirrel away cash and other liquid reserves.
“Ultimately the liquidity regime will help the system to be more resilient and safer,” he says. “But if you impose the leverage ratio but push out the liquidity requirements for two years or so you can end up with trade-offs between the two that might not be optimal.”
Yet despite such pressures, Mr Dougan, who keeps an unusually low profile for a top manager of a global bank, rejects the widespread notion that the significant shifts in regulation will turn banks into utility-like, unexciting entities with minuscule returns.
“There will be as much if not more variety in terms of businesses. But they will tend to be smaller than before and they will tend to be more capital-efficient and focused,” he says.
At Credit Suisse, he adds, this transformation is nearing completion. “We’ve done an awful lot. The regulatory environment is still dynamic, there are new things that are coming up that we will need to adapt the business model to. But I think we’re a long way down the line in terms of getting to a business model that works in the new environment,” he says.
At first glance, the changes at Credit Suisse might not seem overly dramatic. Its domestic rival, UBS, decided – after a string of disasters – to significantly downsize its fixed income trading business last autumn. But Credit Suisse has persisted with something closer to a full-service banking model, in spite of some analysts’ calls for a more radical restructuring.
Yet, on closer inspection, Credit Suisse has changed significantly. At the end of 2007, the year in which Mr Dougan took the reins, the Swiss lender’s balance sheet had reached SFr1.36tn ($1.46tn). At the end of June, it was SFr919bn, and Mr Dougan plans to cut the bank’s assets to below SFr900bn by the end of this year.
At the same time, Credit Suisse has rebalanced the relationship between its investment bank and its wealth management business. Whereas the investment bank used to consume about 60 per cent of Credit Suisse’s capital, now each division targets about half.
“We have really focused on our private banking and wealth management business as we view that as a high returning but capital efficient activity,” says Mr Dougan.
“But we have also transformed the investment bank into something that is much more capital efficient and client focused and as a result is less risky, less volatile and therefore hopefully a higher-quality business.”
After half a decade of firefighting, Mr Dougan feels that the group can once again focus on growth. “We see a number of areas that are potentially important growth areas going forward, but it will need to be done in the context of discipline on costs and returns,” he says.
Emerging markets, in particular in southeast Asia and Latin America, he says, are one area of interest.
Perhaps most intriguingly, though, he also wonders whether, five years after the collapse of Lehman Brothers, the mortgage-backed securitisation market in the US is making a comeback.
Credit Suisse has been among those trying to reinvigorate this market, and this year has completed several sales of sliced and diced bonds backed by US residential mortgages.
“It would have to be very different from last time around in terms of the safeguards around it,” Mr Dougan cautions. “But it’s a big market that’s important to the economy and clients – it could be a pretty interesting opportunity.”
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