Benedict Roth
Benedict Roth is a risk management expert who specialises in collateralised portfolios.

Benedict was Head of Global Funds Credit Risk Analytics for 5 years at HSBC before spending 8 years with the Bank of England in a number of supervisory roles, giving him a dual perspective both as a practitioner and as a regulator. He is therefore well equipped to comment on issues arising from the Greensill and Archegos collapses.

Regulatory gaps

Many lawyers will be aware of Credit Suisse’s recent Greensill and Archegos losses but not all will have appreciated the regulatory pressures and financial structures which brought them about.

I provide below a summary of the Greensill structures and some commentary on what went wrong. A future note will look at the Archegos structures in the same way.

Beware of the leverage ratio

During the first quarter of this year, Credit Suisse reported1 losses of $4.7bn from credit exposures to Archegos, a family office, and approximately $3bn2 from exposures to Greensill Capital, a supply chain finance specialist.

Both borrowers had chequered histories and both exposures could have been documented with maximal transparency as secured loans. But they were not: Archegos’s financing – which was reputed to have extended to $10bn – was structured with equity swaps while Greensill’s was routed, via special purpose entities and an insurance wrapper, into Credit Suisse’s asset management arm, side-stepping the bank’s balance sheet altogether and leaving its asset management customers to bear the losses.

And both these structures had the effect of enhancing the bank’s regulatory ratios. In the case of Greensill, the most important of these for lawyers to consider is the leverage ratio. Instituted by financial regulators after the 2008 crisis, the leverage ratio forces banks to capitalise between 3% and 5% of their assets with equity, regardless of these assets’ underlying risk. Effectively, it encourages banks to move assets off-balance-sheet and prevents them from accepting additional deposits, even if deployed into ultra-safe government securities, because they cannot raise new capital willy-nilly to support the resulting balance sheet assets.

Many banks responded to the leverage ratio by shrinking their balance sheets: Credit Suisse, which operates with a leverage ratio between 4.0 and 4.4%,3 contracted its assets by 25% between 2011 and 2019, a reduction of CHF 262bn, mainly from the trading book.4 But, over the same period, the funds under management in Credit Suisse’s asset management operations grew by 23%, an increase of CHF 277bn. On-balance-sheet asset volumes, previously under tight regulatory scrutiny in the regulated deposit-taker, had shifted into a more loosely-supervised regime under the asset manager. One of these funds focussed on supply chain finance.

Supply chain finance

Supply chain finance is more commonly known as invoice discounting or factoring and is a well-known source of finance for small businesses who supply services to larger or better-rated ones. If the lender can take possession of the smaller firm’s invoices, either via a pledge or via outright purchase at a discount, it can offer the small firm financing while relying on the credit standing of the larger one.

The process is not risk-free. But conservative lenders are careful to ensure that the invoices they purchase are genuine; that they carry out a proper credit analysis of the firms which are due to pay them; and that they don’t build up concentrated credit exposures to any one of them.

Greensill Capital

Credit Suisse’s asset management arm did not carry out its own supply chain finance, nor did it diversify its portfolio. Its supply chain finance funds were composed entirely of notes issued by Greensill Capital, backed by the obligations of Greensill’s customers. And Greensill had a non-traditional approach to invoice financing: rather than selling its services to small suppliers and thereby building up a diversified pool of invoices, issued to a broad range of high-grade purchasers of goods and services, it marketed itself to those purchasers of goods and services themselves, offering to discount the invoices that their suppliers issued.

As a result, Greensill’s credit portfolio was far more concentrated than that of a traditional invoice discounter. And perhaps by coincidence, it appears to have marketed itself to a number of well-known corporate failures: Brighthouse and NMC Health both appeared on its customer lists,5 in additional to its well-publicised exposures to GFG Alliance. It appears to have offered GFG Alliance financing on the basis of invoices that did not exist6 and at least one of the companies listed in the portfolio report of Credit Suisse’s supply chain fund did not exist.

Given its unusual business model, Credit Suisse’s asset management arm could not possibly have purchased Greensill Capital’s notes without the third-party credit insurance which Greensill packaged into them. Effectively, Credit Suisse appears to have relied on the insurance rather than on its own due diligence, allowing it to market the funds to clients as providing ‘stable and uncorrelated returns’7 in spite of the poor credit quality of Greensill’s business. A fact-sheet lodged with the Luxembourg Stock Exchange assigned the Supply Chain Finance High Income Fund a risk-rating of 2, on a scale of 1 – 7 where 1 represented the lowest possible risk, and suggested that even in a stress scenario the investors would recover 94% of their capital after three years.8

Whether investors will now be able to recover their capital is therefore dependent on the credit insurer.

Chequered reputation, conflicts of interest

Like Bill Hwang, the founder of Archegos, Greensill Capital had a chequered reputation. Its paper featured in a portfolio managed by Tim Haywood, a fund manager suspended in 2018 by GAM, the Swiss asset manager, following problems with risk management and record-keeping.9 In 2019, the underwriter of its credit insurance policies was dismissed for exceeding his authority.10 It was reported to have been struggling, in October 2020, to appoint an auditor.11

Furthermore Lex Greensill, the founder of Greensill Capital, appears to have been a customer of Credit Suisse’s private bank. Asset managers are normally operated independently of the banks that own them, acting in the interests of their clients. Not so with Greensill Capital.

Internal risk management

Effective risk management is difficult to acquire and maintain, especially when regulatory pressures encourage the substitution of traditional banking products with highly-structured non-banking alternatives. Perhaps regulators should reduce incentives for banks to take their deposit-taking businesses off-balance-sheet and consider more carefully the potential conflicts of interest that might arise if their asset management arms lend to customers of the bank.

If Credit Suisse’s problems could create an open discussion on these issues, before the next cycle of risk management losses, they will have served a useful purpose.

1 Credit Suisse’s trading updates on Archegos are available here and here; its updates on Greensill are available here and here.
2 On March 25 2021, the Financial Times report here estimated the Greensill losses in Credit Suisse’s asset management arm at approximately $3bn.
3 Credit Suisse’s annual reports are available here.
4 See Credit Suisse’s annual reports, referenced in the previous note.
5 The Financial Times reported on Greensill’s client list here.
6 The FT reported here on the possibility of fraudulent invoices underlying Greensill-issued paper purchased by Credit Suisse funds and here on invoices issued by a company that did not exist.
7 Most client documentation on the funds has now been removed from the Credit Suisse web-site but the Luxembourg Stock Exchange still holds a fact-sheet and prospectus here.
8 See the fact-sheet on the Luxembourg Stock Exchange mentioned in the previous note.
9 GAM’s relationship with Greensill and the dismissal of its fund manager was described in the Financial Times here.
10 The FT reported here on the dismissal of Greensill’s Australian credit underwriter.
11 The FT reported here on Greensill’s search for a new auditor.


GBRW Expert Witness Limited

Paul Rex, Jeremy Denton-Clark, David
Croft, Tim Dowlen, David Ellis,
John Turnbull

Level 17, Dashwood House
69 Old Broad Street
London EC2M 1QS
T: +44 (0) 20 7562 8390
F: +44 (0) 20 7681 2012

Singapore office:

Martin Edwards, Director, Asia
T: +65 9623 1657

Athens office:

Emmanouil (Manolis) Skourtis
T: +30 693 680 2792

Expert Witness register Law Society of Scotland Expert Witness register