Credit Suisse wasn’t a balance sheet failure. It was a reputation failure

By Damian Reece, Senior Counsel

Can UK banks escape the current commotion engulfing lenders in Europe and the US? No collapses, no bailouts, no shotgun weddings, and shareholders and bondholders taking the pain. HSBC’s textbook takeout of Silicon Valley Bank’s British entity suggests that the lessons of 2008 really have been learned with better capitalised, better run and better regulated banks proving themselves socially useful.

If this all sounds a little complacent, it’s meant to. While it may appear that the lessons of 2008 have been learned, the more pertinent question is what about the lessons of 2023? I’m sure banks’ communications teams are already working on the answer to this question in anticipation of their Q1 updates due at the end of April. The responses will no doubt focus on balance sheet strength, leverage ratios, liquidity and conservative funding models. However, all these measures are the answers to the 2008 crisis, not 2023.

Banks take note – Credit Suisse wasn’t a balance sheet failure but a reputation failure, something much more complex and difficult to manage. How banks address this risk should now be the key question for stakeholders.

While we can all agree Silicon Valley Bank’s collapse was down to disastrous balance sheet decisions and America’s lax regulation of smaller banks, Credit Suisse had plenty of capital and oodles of liquidity. It was a top quartile bank by size and while its shareholders were used to some pedestrian returns and were aware of depositor outflows, this was not unique amongst top European banks.

Giving too much credit

But Credit Suisse was on the edge, close enough to be tipped into the abyss by the first gust of a financial storm. Why? It wasn’t financial weakness that sent it tumbling, it was years of scandal, management miscommunication, and a famously toxic culture set from the very top. Credit Suisse forgot that banking is a confidence game (otherwise known as trust) and over the past decade or so no one seems to have reminded its Board and management of this basic point. The bank looked and sounded increasingly dodgy thanks to its reputation mismanagement, and it took very little for the market to ultimately decide it really was dodgy.

To re-cap, briefly. In the 1980s Credit Suisse set the tone by falsifying accounts for Ferdinand and Imelda Marcos to hide their stolen funds. More recently it turned to private eyes to spy on staff. It has been named in countless tax evasion, money laundering and fraud cases around the world from Italy to Mozambique and was at the centre of recent scandals such as the Archegos collapse and Greensill.

The first reaction to SVB’s collapse was not for the market to ask, “which banks are the largest and with the strongest balance sheets?” but instead “which banks do we trust?” The answer to the two questions is not necessarily the same, and the verdict for Credit Suisse was clear.

Reputation is the central commodity to success in banking, something Credit Suisse’s management, Board, and advisers did not understand. You can bet your bottom dollar that all our banks will be running reviews of SVB and Credit Suisse and asking how exposed they are to these collapses. Top of the list will be questions such as: how strong are our capital buffers and how conservative are our lending ratios? But first and foremost should be: how strong is our reputation?

Growth has a PR problem – read Damian’s analysis of rehabilitating growth as a societal good

Banking on better boards

Reputation is a function of conduct and a key part of conduct in banks is how they behave when planning for risk. How do they assess what might go wrong and what do they do when it does? A key lesson from 2008 was the lack of challenge on the Boards of banks and the experience of both SVB and Credit Suisse suggests this deficit is still a problem. Only with meaningful challenge can banks hope to identify and avoid the pitfalls that can damage reputation and therefore trust.

Risk planning is the same as reputational planning and needs communications at its heart. An executive team and Board that live a bank’s values is essential to ensuring trust, but a culture that encourages challenge to that executive team and Board is even more fundamental. It’s about being honest with yourself as a corporate entity. As a footnote, this culture cannot be engendered on Zoom or Teams – it must be done in person as far as possible.

The key lesson of Credit Suisse is a reminder to communications leaders that they are the custodians of reputation within a bank, the very real commodity at the centre of the banking business model. As such, it is beholden on them to be the challenger of last resort and insist attention is given to how things look from the outside point of view. Has the chair considered Board culture recently? Is there sufficient challenge on the Board and within the bank’s executive culture to ask the right questions to identify and mitigate risks across the organisation’s entire span of operations? If not, the result will soon end up on the desk of the communications chief to sort out.

Trust and reputation are real, not intangible, assets

Another lesson is the risk of underestimating the damage of reputational issues. When you are running a confidence business, such as a bank, each mistake compounds on previous errors so when things do go wrong it is essential to over-index on putting things right and showing a bit of humility too.

The travails of SVB and Credit Suisse may not have had balance sheet issues in common, but they did both suffer that other slayer of banks – hubris. Top of the Q&A list for management to rehearse for their next results presentations should be: tell us why we should trust you?

Damian Reece is Senior Counsel at Instinctif Partners and former Head of Business of the Telegraph Media Group.