The Archegos fiasco at CSFB

Last month, Credit Suisse Group (CSFB) released conclusions from an independent investigation of it’s role in the Archegos collapse in March this year and the conclusions of the report are quite damning and is an illustrative case study for risk management and corporate risk culture. The report at 175 pages long is voluminous but fascinating and should have been in your summer reading list as it provides an inside view on what was going on inside the bank that led CSFB to have the biggest losses amongst major banks from the collapse of Archegos.

The report points out in plain terms that the $5.5 billion loss taken by the bank was due to the following cultural factors;

1) Indifferent attitude towards risk -risks that were acute and in plain sight were systematically ignored by both business and risk management.

This was evident as;

• There was failure to act on known risks within 1st and 2nd lines of defense.
• Prime Brokerage (PB) unit allowed Archegos to take large positions outside their set thresholds. On top of they exacerbated the problem by providing lower margin rates to gain business.
• Risk failed to push back on the business or to impose deadlines for the business to eliminate limit breaches and to right-size the risk. As an example, Risk team ignored conclusions from their suite of scenario exposures.
• Risk never took a holistic view either of Archegos losses or how to mitigate it by taking a step back to assess the overall situation and just worked on ad-hoc solutions to reduce limit breaches.
• Risk did not have access to position level data and had to ask 1st LoD for running scenarios
• Business failed to fund for dynamic margining and the senior most Risk Committee set up to escalate exposures like Archegos had access to data more than a month old

2) Lack of accountability for risk failures. This was due to problems of dual management structure which was aggravated by reduction in staff as well as erosion of senior staff members in both Business and Risk.

• Prime Brokerage unit had two co-heads and neither actively managed the business and its risks due to lack of defined responsibilities.
• The report notes that both co-Heads had numerous other responsibilities and were basically inundated with other management tasks leading to lack of clear line of sight over Archegos.
• The Credit Committee formed to monitor credit exposures like Archegos did not include the above two Co-Heads and there was no other forum for Risk unit in 1st Line or 2nd line of defense to escalate concerns to these co-heads
• Staff covering risk in Prime Brokerage as well as Credit Risk Management had mostly junior employees who were inundated with multiple clients

3) Cultural unwillingness to engage in challenging discussions or to escalate matters posing grave economic and reputational risk. This comes out as key damning statement and will be the hardest to address as it strikes at the root of an inability to make tough calls. As an example, the Firm’s Credit and Reputation Risk committees functioned as form over substance with no concerns being raised or discussed. Similarly, the PB unit did not make tough calls to ask for more margin when the initial margin provided by Archegos eroded and ignored risk limits and breaches.

Recommendations: In light of the above cultural failures, the recommendations of the report are basic bread and butter stuff of risk management and is a reminder of what is essential and critical for effective risk management;

• Invest additional resources in risk management;
• Clearly define roles and responsibilities;
• Reassess reputational risk review triggers and processes;
• Improve risk discipline and treat limits as limits;
• Re-examine risk appetite and controls;
• Develop a more holistic view of counterparty risk management
• Improve access to data and technology;
• Improve management information for effective monitoring of
  exposures;
• Instill a culture of accountability, compliance, and respect for
  controls.