For much of the past two decades, banks have been poor long-term investments as shown by the shrinking weight of the sector in the FTSE 100. Two decades ago banks accounted for four-fifths of the 27% weighting of financials in the index. Today financials account for just 18% of the FTSE 100 in total. 

Stringent regulation, tax raids by opportunistic governments and a need to evolve rapidly in the face of technology are just a few of the headwinds that have held back the sector over the past 20 years, but after this extended period of underperformance, positive signs are starting to emerge.  

The collapse of Silicon Valley Bank, Credit Suisse and others earlier this year did not set off the widely expected chain reaction across the sector. Instead, banks have remained dull performers in Europe and the US while performing surprisingly well in the UK, Japan and emerging markets (ex-China) suggesting they may be in the early stages of a significant upswing in their fortunes.

A sector upswing 

The core business of banks is to borrow short-term and lend long-term. When short-term interest rates are higher than long-term the margin between what banks pay to depositors and what they can charge borrowers for long-term loans is squeezed. This may be about to change.

With US inflation down to 3.7% interest rates in the current range of 5.25-5.50% are surely set to fall before long. Yields on 10-year Treasuries stand at 4.3% but have much less, if any, downside. They should be above short-term rates (yields on two-year Treasuries currently stand at 5%) sometime next year, as is also likely in the UK and Europe.

This would be very good news for Polar Capital’s Global Financial Trust (PCFT) which currently trades at a 11% discount to net asset value. Banks comprise 46% of its portfolio, financial services (such as Visa and Mastercard) for 28% and insurance for 17%. 10% of the fund is allocated towards fixed income and the portfolio is globally diversified.

The Trust won approval to extend its life in April 2020 and opportunistically raised an additional £122m of equity a year later so it now has net assets of £500m. Since the fundraise, the share price has fallen while the net asset value and the benchmark sector index have stagnated but a dividend yield of 3.8% has provided consolation.

Insurance overlap 

Perhaps unfortunately, PCFT has little overlap with Polar’s £2bn Global Insurance fund, whose performance has been strong, returning 55% in the last five years compared with the 50% return from the sector index and 10% over the last year. As Dominic Evans, its co-manager, points out “insurance is not a discretionary purchase so is resilient in difficult economic times while the rise in interest rates means that the income from cash balances, arising because premiums come in long before claims are paid out, has increased significantly.” 

Rate increases have “accelerated,” especially in the property sector, but so has the cost of the reinsurance which insurers have to buy. Evans expects “book valuation growth for the sector to be in excess of 16% for the foreseeable future which is not reflected in a ratio of price to book value of 1.7.” This means that “there is compelling value in the sector” which will do PCFT no harm either.

As PCFT co-manager Nick Brind says, “financials have significantly lagged the market this year despite operating performance remaining resilient. Valuations for much of the sector remain at very low levels.” In a sector where both individual stock risk and country risk are high, PCFT’s diverse global exposure provides protection while offering attractive exposure to the next cyclical upturn in banks. 

Recent banking scares with the collapse with SVB and Credit Suisse, coupled with a fall in house prices, has triggered an increase in the number of buyers turning to gold investing to shield their portfolio from market volatility.

Latest data from The Royal Mint shows a 26% annual jump in the volume of physical gold purchases made last year - this jump in gold buying was primarily driven by millennials and Gen-z. Gold bullion purchases increased last year, with sales rising by 33.5%.

Gold started 2023 at a 9-month high in January and hit a 12-month high after events like the collapse of Silicon Valley Bank pushed prices higher.

But following the collapse of SVB, gold prices reached highs of $2,000 (£1,603) on week commencing 13 March and the Mint saw a 230% week-on-week increase in sales of gold investments.

The Royal Mint, the gold buying trend is not slowing down with the demand for physical gold expected to continue in 2023.

Market uncertainty has certainly left many investors reviewing their portfolios and considering ‘safer’ homes for their money. Earlier this month, the Bank of England found that investors were flocking to NS&I to take advantage of the safety-net that comes with the government backed bank.

But for those looking to diversify with alternative assets, we consider whether physical gold is the answer.

Will the gold surge continue?

A poll of over 2,000 UK investors by The Royal Mint found there is almost certainly a growing trend to buy gold, with one in four investors (23%) saying they plan to invest in gold this year, rising to 26% among Gen-X investors.

Precious metals are the second most popular investment right now, only behind UK stocks and funds, with nearly a third of investors (30%) planning to invest in the asset class in 2023.

Nearly one in six investors (16%) who haven’t previously invested in precious metals plan to in the future, further highlighting the increasing popularity of the asset class.

The growing popularity of precious metals is, in many cases, being driven by the increasing investment appeal of the asset class as a potential means to protect portfolios in volatile markets.

A majority (53%) of future precious metals investors surveyed said they are motivated to invest by the asset’s ‘safe haven’ status, with many (29%) encouraged by the belief that the asset is less risky than other investments.

“It is clear from the data that investment risk is front of mind for UK investors, with many looking to add precious metals to their portfolios this year,” said Andrew Dickey, director of precious metals at The Royal Mint.

“We are seeing more investors consider, and invest in, precious metals as a potential means to protect their portfolios and attempt to navigate volatile market conditions. From our experience, gold and precious metals grow in popularity during challenging times for the global economy as investors look to diversify their portfolios and hedge against inflation,” he added.

Investors are ditching property for gold

With rising interest rates and falling house prices, investors are also looking at gold instead of property.

“We’re seeing people looking to reduce their exposure to European real estate, which is being affected by rising interest rates, increasing mortgage costs and significant cost of living pressures as inflation remains high,” says Josh Saul, CEO of the Pure Gold Company.

“In fact, a number of our clients are now looking to sell property and protect the proceeds in physical gold, where prospects for a stable and reliable return remain good.”

What makes gold a ‘safe haven’ asset?

Gold is considered a safe haven asset because it has historically held its value during times of economic uncertainty and market volatility.

The Royal Mint saw a near 26% uplift year-on-year in the volume of gold investments during 2022 as investors sought to protect their money amid a difficult year.

Unlike stocks and bonds, which are subject to market fluctuations and inflation, gold is often seen as a store of value that can help protect portfolios from market downturns.

During times of high inflation, gold is especially popular among investors because it is perceived as a hedge against rising prices, according to Dickey.

He said: “For many risk-conscious investors, these market moments are only a trigger for a long-term investment in precious metals that grows over many decades and retains what many see as its ‘safe haven’ status.”

How to invest in gold

There are many ways to invest in gold – from buying gold bullion to shares in gold miners and Gold ETFs. Take a look at our article on how to invest in gold for more information on how to get started if you are looking to add gold to your portfolio.

“Each way to invest has its own benefits so it is important to do your research and ensure this aligns with your own circumstances and preferences,” said Dickey.

Physical gold can be bought from distributors like The Royal Mint, as well as specialist gold dealers. Always check if the dealer is part of the London Bullion Market Association, which sets common standards across the industry and can help avoid scams.

Gold dealers make their money by selling for more than the spot price, so remember to shop around to see if you can find a better deal.

Dickey said more affordable routes, such as owning “fractional amounts via digital gold products like DigiGold” can be a good option for those who require a smaller amount of gold, or who prefer to hold the asset digitally.

MoneyWeek has always recommended investors hold gold – anywhere between 5% to 10% of their portfolio, due to its status as a “safe haven” investment.

The collapse of Silicon Valley Bank and Credit Suisse in the US has undoubtedly sent shockwaves across the globe, but for both savers and investors, it has left many nerves rattling, with questions being asked over whether money is safe with a bank. With more savers switching to the safety of NS&I, we look at whether now is a good time to switch to government-backed National Savings & Investments (NS&I).

NS&I has attracted £2bn in February alone, according to Bank of England data.

In December 2022, £700m was deposited, while a month prior, £300m was withdrawn from accounts.

While UK savers and investors benefit from a layer of protection from the Financial Services Compensation Scheme (FSCS) - which covers you for up to £85,000 should a bank or building society go bust - with NS&I, your cash is guaranteed by the Treasury to be safe no matter how much you hold.

And with an increase in interest rates across NS&I savings accounts, savers are increasingly looking to stash their cash there for higher returns and added security.

It is highly expected that NS&I may increase rates further to help boost funding - this is looking more likely as the Bank of England put up its Base rate this month to 4.25%.

If NS&I rates do go up, it is likely that more will turn to it as market volatility in the banking continues, which has already seen some investors readjust their portfolios according to investment platform Interactive investor.

Should you save with NS&I?

If you have more than £85,000 saved in cash, which you may have if you are saving for a house deposit maybe, then it makes good sense to put it into a NS&I account as you get a higher level of protection.

If you are worried about your bank not being safe, then it is worth noting that banks are covered for up to £85,000 of your cash via the FSCS. You can see if your bank is covered at FSCS.

What rates does NS&I offer?

NS&I has been upping rates for its products, including the premium bond prize fund rate from 3.15% to 3.3%, meaning there will be an extra £15m in prizes up for grabs each month.

We have the details of the March premium bond winners in our article - March premium bond winners revealed.

It marks the fifth rate increase for premium bonds in the last year alone.

In February, NS&I bumped up the interest rate on its green savings bond - up from 3% to 4.2%. It is available on a three-year fixed term.

This year also saw the relaunch of NS&I’s one-year fixed bonds, offering rates up to 4%, pitching the bonds as a competitor to some of the best one-year fixed savings accounts.

Meanwhile, its direct saver account offers a 2.85% variable rate, while its direct Isa offers 2.15%.

The junior Isa currently offers 3.4%.

Bank, building society or NS&I?

It’s not only NS&I that’s been attracting positive inflows. Banks, building societies and NS&I reported a combined net flow of £3.6bn into customer accounts – £300m more than in January.

And while NS&I may look look attractive, you may find better interest rates elsewhere - conventional banks may be incentivised to continue putting up rates to persuade savers to keep their cash in place.

Samuel Tombs, Pantheon Macroeconomics chief UK economist, said: “Households will be further disincentivised from spending their savings if, as we expect, banks raise deposit rates in order to ensure that depositors who have funds over the £85,000 guaranteed by the Financial Services Compensation Scheme do not withdraw their money.”

But savers are “continuing to vote with their feet” and shift their money to better-paying accounts, says Laura Suter, head of personal finance at AJ Bell.

“Fixed-rate accounts continued to be popular, as people lock in higher rates, with £6.8bn of money deposited in these accounts. February was the fifth consecutive month where people moved their money out of easy-access accounts and into fixed-rate ones.

“As many signal that we’re nearing peak interest rates it’s a good time for savers to snap up higher rates now, before the market plateaus when the Bank of England ends its rate-hiking cycle,” she said.

What happened to Credit Suisse? Espionage, fraud, money laundering, controversial clients – you name it and chances are the bank has been accused of or involved in one of these scandals.

We need only look as far back as 2021. In March the bank was involved in the collapse of Greensill Capital, and then the downfall of Archegos Capital just days after – both of which cost it billions in losses.

Then in October of that year, the bank was fined $350m and pled guilty to wire fraud after it was found to have issued unaccounted loans to Mozambique in what became known as the “tuna bonds” scandal.

In June 2022 the bank was found guilty of and fined for its involvement in money laundering relating to a Bulgarian drugs ring – though it’s currently appealing against the ruling and denies wrongdoing.

Ulrich Körner, who joined Credit Suisse as CEO in early 2021, published his turnaround strategy last October as he tried to draw a line under the Swiss bank’s chequered past.

However, the group hardly had time to begin the process before the global banking sector was hit by a crisis of confidence following the collapse of Silicon Valley Bank (SVB).

We look at what happened at Credit Suisse, and what it means for investors.

What happened to Credit Suisse?

Last month Credit Suisse confirmed clients had pulled billions in funds in the fourth quarter, which when combined with legal and restructuring costs, lead to its biggest annual loss since the financial crisis. The lender revealed a 7.3bn Swiss francs (£6.6bn) net loss for 2022, wiping out a decade of profits.

As concerns for its health grew, last week the Saudi National Bank, the bank’s top backer, said it could not give more money to Credit Suisse due to regulatory constraints.

This spooked investors, who were already on edge following the collapse of SVB days before.

Severe outflows followed, which prompted the Swiss National Bank (SNB) to offer a $54bn credit line.

But that didn’t calm markets. “On Friday the liquidity outflows and market volatility showed it was no longer possible to restore market confidence, and a swift and stabilising solution was absolutely necessary,” Swiss president Alain Berset said at a press conference in Bern on Sunday evening.

Regulators spent the past weekend negotiating a takeover by UBS, Switzerland’s largest bank. UBS agreed to buy Credit Suisse for £2.65bn.

What does the merger mean for investors?

UBS acquired Credit Suisse at £2.65bn on Sunday afternoon – significantly below its closing value on Friday, which was around £7bn.

Swiss regulators brokered the deal and will allow it to go ahead without a shareholder vote.

“In terms of the private wealth management space [the deal] creates a superpower that could dominate the industry,” says Andrew Haslip, analyst at GlobalData. “The combination of Switzerland’s two leading banks creates a combined private bank with almost $4 trillion in client AUM as of the end of 2022.”

“While on paper this move looks like a fairly neat solution with minimal government intervention, it is likely to cause significant competitive issues,” continues Haslip. “The forced merger solves the immediate crisis at Credit Suisse. However, there will be a cost in terms of competition in the private wealth management space – especially in Switzerland.”

The operation is “a big risk for UBS”, says Susannah Streeter, head of money and markets at Hargreaves Lansdown.

“It will not only have to accept the healthier parts of the business but its failing ones as well – particularly its investment division, which has been mired in crisis after crisis,” says Streeter “UBS will now be looking to chop up and sell off big chunks of operations, to slim down in size, given that the combined balance sheet is twice the size of Switzerland’s economy.”

Credit Suisse’s clients are mostly wealthy clients and businesses, not everyday savers. But the repercussions of its collapse have rocked markets, raising further concerns about the state of the banking sector. There’s also a risk of potential spillover effects as the bank’s investors deal with large losses.

Holders of risky Credit Suisse debt saw their investment wiped out after the government wrote down the value of these bonds to zero, resulting in a £14bn loss.

Investors are allegedly considering legal action over the takeover.

Is this a repeat of the 2008 financial crisis?

The UK government said the UK banking system remains “safe and well-capitalised” following the deal.

Indeed, bigger banks are in a far better position than they were in 2008. “They have built up much bigger capital cushions since the financial crisis, have more stable deposits, and some are seeing greater inflows of cash as companies and individuals seek out safer havens to put their money,” says Streeter.

”They are also much less likely to have to sell off bonds, they may have a paper loss on right now, but instead will be able to hang onto them until they mature.”

“In theory, there is no reason for the Credit Suisse crisis to extend,” adds Ipek Ozkardeskaya, senior analyst at Swissquote Bank. “As what triggered the last quake for Credit Suisse was a confidence crisis – which doesn’t concern UBS – a bank outside of the turmoil, with, in addition, ample liquidity and guarantee from the SNB and the government.”

The collapse of Silicon Valley Bank brings back memories of 2008 – but the risks are different in this cycle.

“Generals are always prepared to fight the last war,” goes the old saying. Investors often make the same error when they face a new crisis.

The frantic way that markets have reacted to the ructions in the US banking sector over the past week shows that many of us still see events through the framework of 2007-2009.

The spillover from the collapse of Silicon Valley Bank

Take the sell-off in European banking stocks on Wednesday that saw trading temporarily halted in BNP Paribas, Credit Suisse, Monte dei Paschi, Societe Generale, and UniCredit, and also brought a nostalgic return to that late 2000s/early 2010s sport of watching bank credit default swaps (CDS) as Credit Suisse traded “points upfront”. It is striking that the failure of three idiosyncratic banks in the US and yet more headlines about a structurally dysfunctional Swiss bank sparked such a panic.

It’s possible that by the time you read this on Friday, everything may have spiralled into a vast financial meltdown, in which case this analysis will look short-sighted. But my assumption is that investors who use the last crisis as a guide to the next cycle are missing the real lessons.

Another financial crisis is unlikely

Back in the late 2000s, markets took the tech wreck as a blueprint and drew false comfort from it, because the largely equity-funded dotcom didn’t hurt the banking system much. That led them to overlook a crisis built mostly on toxic assets and unstable funding within banks.

The situation today is very different, for reasons that are not simply down to how healthy banks are.

Yes, most institutions are almost certainly more robust than they were in 2007, although it’s hard to be sure what problems could emerge in response to higher interest rates – if we’ve learned one thing about the financial sector, it is that banks make remarkably stupid decisions and then act very surprised when they blow up in a predictable way.

However, the more important change is that 2008 up-ended a lot of established principles about how policymakers will respond. We can see that in what happened this week: quick seizures at Silicon Vally Bank and Signature Bank, depositors protected, and a generous approach to providing liquidity to reduce the risk of future runs.

Banks will be supported, even if shareholders and bondholders are wiped out. While there will be some bad assets in the system, the more fundamental issue is probably assets that may be sound, but are overvalued for a new world in which both inflation and rates are rising – such as long-term bonds.

The most likely scenario is that these correct to more reasonable valuations over a long period of time – eg, like the 1970s. There will be rapid nominal losses for anybody who’s forced to sell and an even more insidious risk of slow, real-terms losses for investors who hold them to maturity.

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Share tips of the week

Credit Suisse stock has plunged nearly 58% this year as the bank has fought off scandals and reported large losses. And the selloff in the shares has only accelerated in the past week as rumours about the group’s financial health have started to grow online.

The headwinds hurting Credit Suisse stock

Credit Suisse is in the middle of a crisis, says Ben Martin in The Times. Executives at the “troubled bank” have failed to allay investors’ fears about its “financial health”.

The problem began last week when worries started to circulate “that the lender could be in trouble”. In response, executives “raced to bolster confidence in the loss-making group” through a series of telephone calls. However, the slide in the Credit Suisse share price, which at one stage reached 12% on Monday, and the rise in the cost of insuring its debt against default (measured by credit default swaps) suggest that “those efforts have fallen short”.

The spike in borrowing costs and the fall in Credit Suisse stock is a little extreme given that “there was no obvious bad news to explain the moves”, says Liam Pound on Breakingviews.

What’s more, its managers have a point when they argue that “its liquidity and capital position are strong”.

After all, as of June, Credit Suisse had a “respectable” common equity Tier 1 capital ratio of 13.5%, as well as CHF232bn of liquid assets, around “the sum of its short-term borrowings and quickly-accessible customer deposits”. As a result, “it would take a very large loss or sudden withdrawal of funding to bring the bank to the brink of failure”.

Credit Suisse’s chequered history

Still, it’s not surprising that investors are developing jitters, says Lex in the Financial Times.

Credit Suisse stock definitely “has all the makings of an easy short”. It has had a “chequered history” over the past few years, with losses from the Archegos and Greensill scandals.

There has also been a “revolving door of managers”, with Credit Suisse’s new chief financial officer, Dixit Joshi, starting last Monday. It might be a good idea for CEO Ulrich Körner to “bring forward a promised clean-up”.

Prioritising the strategy announcement is definitely a good idea given that the bank’s third-quarter earnings results, due at the end of this month, are unlikely to be strong enough to reassure investors, says Rochelle Toplensky in The Wall Street Journal. The “broad outlines” – a “scaled-back investment bank and some swingeing cost cuts” – are already known.

However, investors are unsure whether Credit Suisse “will quickly cut the investment bank, which [is likely to] require raising capital at a painfully low valuation”, or instead “try to self-fund the cull, which would therefore need to be slower and narrower”.

Whatever happens, the recent volatility in Credit Suisse stock and credit-default swaps highlights the “deeply unforgiving” mood of the market, says Ben Marlow in The Daily Telegraph.

When a CEO of a major global bank is “drowned out by entirely unfounded speculation on Twitter and internet forums”, some of which came from the account of a YouTube DIY property investor, something has seriously gone wrong. It is clear that in this febrile environment, investors are “looking for any excuse to sell”.

A couple of weeks ago, back when Russia was still deemed unlikely to invade Ukraine, we noted that history suggests that markets as a whole tend to get over geopolitical shocks quickly. As a result, we said, other than holding gold as a hedge (which you should be doing anyway), there wasn’t anything you should change in terms of your asset allocation. We also said that if you wanted to bet specifically on tensions diminishing, the easiest way to do so was via the JPMorgan Russian Securities investment trust.

Well, as we now know, tensions didn’t diminish. Instead, Russia invaded Ukraine without attempting to find even a flimsy pretext, while the West imposed the most stringent economic sanctions ever placed on a major global power. The point stands that geopolitics tends not to derail major markets. And in recent decades, investors have been rewarded for snapping up markets as and when they became sufficiently cheap on a Cape basis (cyclically adjusted price/earnings ratio), as in the eurozone sovereign debt crisis.

However, it’s also worth remembering that these “don’t worry, be happy” studies mostly draw on data from US markets. Look elsewhere and you find that, as financial historian Russell Napier has pointed out, there are two things that can and have caused markets to shut down or fall to zero. One is communist revolution (investors in Russia in 1917 and in China in 1949 suffered “total losses” as a result, according to Credit Suisse); the other is war. The former destroys property rights, the latter destroys property. A third threat – capital controls – can make it impossible to get your money out of a country even if an asset technically still has value.

For anyone with exposure to Russia – either directly or via funds – what does that mean? The main immediate issue is that most Russian assets are hard or impossible to trade – the Moscow Stock Exchange is shut, for example. This means that putting a number on what anything is worth is far trickier than usual. In the case of the JPMorgan Russian trust, for instance, which owns a lots of locally listed stocks, broker Numis suggests the fund has a net asset value of around 99p per share (though it emphasises that this is a “guesstimate”) versus a share price of about 160p (as of 2 March).

In the longer run, a truce might lead to relations between the West and Russia being “normalised” and sanctions lifted, but even if that (highly optimistic) scenario comes to pass, there’s the ongoing economic fallout that Russia and Russian companies would have to deal with. And that’s arguably the most upbeat scenario. In short, it’s not an exaggeration (for once) to say that Russia, at the moment, really is uninvestable.

A massive data leak from the Swiss banking giant Credit Suisse has revealed details of 18,000 bank accounts, and 30,000 account holders, stretching back decades and holding more than $100bn in all. Some of the account holders are individuals, others are corporations, and 160 nationalities are represented. The sums involved are vast: the average account held about CHF7.5m at its largest point (about £6m, or more than $8m), and more than a dozen held more than $1bn. The anonymous leaker, who is a current or former employee of the bank, approached the Suddeutsche Zeitung journalists behind the Panama Papers and Pandora Papers data dumps over a year ago. Since then a team of journalists from an international consortium of newspapers (including The Guardian and The New York Times) has been investigating and checking the data – and this week published a selection of findings.

What did they discover?

That scores of criminals, kleptocrats and other assorted shysters have been accepted by Credit Suisse as clients. Eduard Seidel, a top executive with Siemens in Nigeria, had accounts containing tens of millions of Swiss francs, and still had them almost a decade after he was exposed in a major corruption scandal. Ronald Li Fook, the chairman of the Hong Kong stock exchange, opened an account a decade after being jailed for taking bribes. Rodoljub Radulovic, a boss of one of eastern Europe’s biggest cocaine-smuggling cartels, was allowed to open an account despite a long history of financial scandals in the US, and used it to launder drug money, according to Serbian prosecutors. Muller Conrad Rautenbach, a corrupt mining magnate subjected to US and EU sanctions, was given a Credit Suisse account even after the UN flagged up his involvement in corrupt deals. Other clients included the sons of Egyptian dictator Hosni Mubarak and Nursultan Nazarbayev, the kleptocratic leader of Kazakhstan. This is probably not surprising. But it’s still grim that a major financial institution lets clients stash away laundered or stolen assets. The anonymous leaker specifically blames Swiss legislators for permitting an “immoral” situation that “enables corruption and starves developing countries” of tax.

What does Credit Suisse say?

It rejects allegations of wrongdoing or lack of due diligence and says that the matters raised are “predominantly historical”. It says that around 90% of the bank accounts covered by the leaks are now closed or “were in the process of closure prior to press enquiries” – and that 60% of those were closed prior to 2015. Yet the “Suisse Secrets” are far from the only scandal involving the bank in recent years. Earlier this month, for example, it became the first Swiss bank in the country’s history to face criminal charges. In a 500-page indictment, the bank has been accused of failing to conduct adequate checks on members of a Bulgarian mafia and drugs smuggling gang who used the bank to launder millions of euros between 2004 and 2008.

Why is Swiss banking so “secret”?

The tradition dates from the late 17th century, when France’s Catholic kings began using the banks in Geneva – a French-speaking city-state just across the border – to conceal their dealings from France’s own Protestant-dominated banking system. By 1713, the city authorities in Geneva had developed rules banning bankers from revealing details of their clients. That centuries-old code of silence was enshrined in law by the modern Swiss state in 1934, with its infamous Banking Law, which compels bankers to keep schtum. That law was originally designed to contain mounting international concern over Switzerland’s involvement in tax evasion. But it had the effect of attracting despots, thugs and tax evaders for decades to come. The law is still in place today, and breaches carry a five-year prison term. Indeed, in 2015, the law was actually strengthened, so that it now applies not just to bankers and other insiders, but to any third party who “reveals” or “exploits” a secret from within a Swiss bank. That’s got journalists spooked, and no Swiss papers risked publishing this week’s leaks.

Didn’t the Swiss agree to open up?

Up to a point. In its statement rejecting the leaker’s claims, Credit Suisse says the leaks are designed to discredit both the bank and “the Swiss financial marketplace, which has undergone significant changes over the last several years”. The changes referred to are those agreed in 2014, and enacted in 2018, when Switzerland agreed to join around 100 countries to sign up to a global exchange of information about their respective taxpayers for the first time. In signing up to the so-called common reporting standard (CRS), Switzerland was bowing to years of concerted international pressure (and gigantic fines from US regulators) that had intensified since the financial crisis of 2007-2008. The move all but ended the allure of Swiss secrecy for tax-evaders from rich developed countries. But there’s an important caveat.

What’s the caveat?

More than 90 countries, including many lesser-developed economies, are not part of the deal. For them, “nothing has changed”, according to Sebastian Guex, a banking professor at Lausanne. “Swiss bankers are still helping the wealthy in those countries to hide their assets form the tax authorities in their own countries.” Banking secrecy is not dead, argue critics – it has merely morphed into a so-called “zebra strategy”, in which Swiss banks are closing the door to dodgy money from rich industrialised nations, but left the door open to the rest of the world. Meanwhile, other financial centres that offer significant secrecy benefits to the super-rich have grown in importance – such as Singapore, dubbed “the new Switzerland” by Andy Xie, the ex-Morgan Stanley chief Asia economist, and London. Switzerland has been famed for discreet bankers for more than 300 years. But these days, it’s one player among many.

Credit Suisse continues to experience the loss of a “slew” of senior bankers, says Nabila Ahmed on Bloomberg. The defections come as Credit Suisse has “slashed” the amount of money set aside for employee bonuses, using the savings to limit the “financial hit” from the recent implosion of the Archegos fund.

Other “debacles”, including its links to the collapsed supply-chain finance group Greensill Capital, have also hurt its reputation. Managers are

now considering offering “retention bonuses” for staff to “stem the bleeding”.

Credit Suisse’s bankers are particularly “frustrated” that the failure of the bank’s prime-brokerage unit, which caters to investors such as Archegos, overshadowed an “otherwise strong” run for the investment bank, says Cara Lombardo in The Wall Street Journal. The bank has advised on several “high-profile transactions” lately, including chipmaker Advanced Micro Devices’ $35bn purchase of rival Xilinx and the $21bn acquisition of Speedway by the Japanese owner of the 7-Eleven convenience-store chain.

Still, there may be some light at the end of the tunnel, says Reuters. Credit Suisse is making “progress” in regaining assets from its suspended Greensill-linked supply chain finance funds. It has recovered $5.9bn out of a possible total of $10bn. This comes after Greensill, which lent money to firms by buying invoices at a discount, collapsed when one

of its main insurers declined

to renew its cover. That forced Credit Suisse to shut $10bn of supply-chain finance funds

that invested in bonds issued by Greensill.

The collapse of Lex Greensill’s business empire has left a messy international trail across several countries, including the UK, Germany, Switzerland and Australia. Former UK prime minister David Cameron, the German federal government, Softbank, and steel magnate Sanjeev Gupta are just a few of the more eye-catching stakeholders involved.

So what actually happened and how are all of these parties involved in the story? Here’s a broad summary of the story so far.

What was Greensill Capital and why did it collapse?

London-based Greensill Capital was one of the world’s biggest providers of supply-chain finance. (You can learn more about supply-chain finance in our previous article on Greensill).

Greensill filed for administration on 9 March. The firm was “in severe financial distress” and unable to repay a $140m loan owed to its main backer, Swiss banking giant Credit Suisse. Part of Greensill is based in Australia, so the company has received some respite from insolvent-trading laws in the country. The supply chain financial services firm said it was also suffering thanks to defaults from global metals and commodities group GFG alliance, which owns Liberty Steel and is run by the company’s chief executive and chairman Sanjeev Gupta.

Things went haywire after a little known insurance company called Bond and Credit company decided to not renew Greensill’s insurance policies worth $4.6bn, which triggered a snowball effect.

So, who is involved?

Some of the biggest stakeholders include Credit Suisse, Japanese investment group SoftBank, steel maker Liberty Steel and the German government.

Credit Suisse is one of the most heavily affected stakeholders due to the large exposure it had to four of Greensill’s supply-chain funds, worth $10bn before the bank chose to freeze them on 1 March. The bank had also given a $140m loan to Greensill in 2020.

Credit Suisse has so far recovered $5.4bn, but stressed that three borrowers are “driving valuation uncertainty” in investments made across four funds. These are Sanjeev Gupta’s GFG Alliance which owns Liberty Steel, Bluestone Resources and Katerra, a construction start-up backed by Softbank. Gupta’s GFG Alliance owes Credit Suisse $1.2bn, Katerra owes it $440m, meanwhile $690m is due from Bluestone Resources, as cited in MarketWatch.

Gupta’s Liberty Steel is at the heart of the scandal and faces the spectre of thousands of job cuts. UK business secretary Kwasi Kwarteng has urged Gupta – who was once touted as the savior of British steel firms – to find new funds for its 3,000 workers, spread across 11 British plants. The government also rejected a request from Gupta for £170m to finance the day-to-day operations of the company and help it stay afloat.

SoftBank, the Japanese multinational conglomerate, had invested at least $400m into Greensill Capital at the end of the year, reports The Wall Street Journal, in addition to the $1.5bn which was invested in 2019 by the Vision Fund.

The crisis also involves a unique set of stakeholders: German local authorities. German towns had held around €500m euros with Greensill bank, based in Bremen. Why? Greensill Bank did not charge negative interest rates, in contrast to most other banks who have done since the ECB cut rates below zero in 2014 in a bid to reinvigorate the eurozone economy.

German regulator BaFin froze the bank’s and filed a criminal complaint over potential balance sheet manipulation, days before the fall of Greensill Capital. And, while Greensill Bank’s lack of negative rates was attractive to German towns, the money was not covered by deposit insurance.

What is supply-chain financing and how will the fall of Greensill affect the market?

The supply-chain finance market was enjoying a stellar year having grown 35% in 2020 to a total value of $1.3trn, according to the latest World supply-chain finance report.

It can take many forms, but it typically uses a technique known as reverse factoring, which allows a corporate buyer to partner with a bank or alternative provider to allow suppliers to be paid early for their invoices.

Critics of the supply-chain finance industry say that such arrangements can be used by companies to push suppliers to accept unusually long payment terms. They are also recorded as trade payables, rather than debt. This can conceal the true level of a company’s financial leverage.

Greensill divided bills and invoices from supply chain companies and packaged them into bond-like investments. Greensill then sold these to investors such as Credit Suisse and banked a profit. In a very low-yield environment, it is not hard to see why these funds may have been attractive to investors.

Erik Hofmann, professor of supply-chain management at University of St.Gallen, says the debacle could trigger a fatal loss of confidence in supply-chain finance and prompt a “domino effect” of investors withdrawing funding.

Why is David Cameron at the centre of the scandal?

Former prime minister David Cameron has largely avoided the public eye since stepping down after the EU referendum, but he has found himself back in the limelight over recent weeks for all the wrong reasons.

While Cameron was prime minister, he appointed Lex Greensill as an unpaid adviser. Upon leaving office, Cameron went to work for his company, making a number of unsuccessful attempts, through various text messages and meetings, to convince ministers to give Greensill access to some government-guaranteed loans.

The revelations have prompted the UK government’s Treasury Select Committee to launch an inquiry into the company’s collapse, with Chancellor Rishi Sunak is expected to appear before it. Cameron is expected to appear in front of one of the Commons public accounts committee, the public administration or the constitutional affairs committees. The former prime minister’s alleged role has also fostered debate on the nature of UK’s lobbying rules.

What does this mean for your money?

In terms of how the scandal will affect investors, the most obvious expected effect would be a fall in Credit Suisse’s shares, so investors who have bought could suffer some losses. Shares have fallen around 27% since 1 March when the bank froze Greensill funds, although some of this loss is also related to Credit Suisse’s exposure to family office Archegos who defaulted on a margin call last month.

Credit Suisse is also considering letting clients foot some of the losses generated by Greensill, as the bank believes the risks were known to investors, Bloomberg reports. Credit Suisse estimates another $2.3bn is still at risk even though it has so far recovered $5.4bn.

Some of Greensill’s clients who have lost funding may have to repay debts early or find other sources of financing. If you do not have exposure to any of Greensill’s clients, then there should be limited impact.

Swiss banking giant Credit Suisse is scrambling to minimise its reputational damage after being embroiled in two of the most contentious events that have recently rocked global financial markets: the collapse of Greensill Capital, and the blow-up of family office Archegos Capital.

The bank recently revealed that it had made a $275m loss in its first quarter. It had been expected to make a solid profit as recently as last month, but that was before the Archegos collapse. Chief executive Thomas Gottstein said that, Archegos aside, it was “one of our best quarters in the history of Credit Suisse.”

Investors begged to disagree – the share price slid by 5% on the results and is down about 17% this year, and around 30% since the start of March, which is when its Greensill-related problems came to light (more on that in a moment). The company has also had to raise more capital – about $1.9bn – via issuing convertible notes.

Credit Suisse was one of several banks which had exposure to the fund run by former Tiger Asia Manager Bill Hwang. But Credit Suisse was among the hardest-hit when Archegos defaulted on a huge margin call, prompting a selling spree in several technology and media stocks.

The Swiss lender separately revealed last month that it is overhauling its asset management business after investigations into the bank’s dealings with Greensill Capital, the scandal-ridden supply chain financial services company, with links to former UK prime minister David Cameron, which filed for insolvency last month.

Why is the bank associated with Archegos and Greensill Capital?

What has Credit Suisse got to do with Greensill? The Swiss lender was a key source of funding for the supply-chain finance company. Credit Suisse bought about $10bn-worth of securitised loans from Greensill. Investors then bought the funds. The bank also lent $140m to Greensill in 2020.

The Swiss bank had to suspend the funds on 1 March after Greensill lost insurance coverage on the loans it had made. This in turn triggered Greensill’s collapse into administration.

The bank has repaid about $5.4bn to investors, and is due to hand out a second payment to investors exposed to the funds, but it predicts $2.3bn is still at risk (although at least some if not all of this will be borne by the fund investors).

Credit Suisse is slashing the bonuses of its most senior directors as well as cutting its dividend by two-thirds. At least seven senior executives have left the bank, including the investment bank’s chief risk and compliance officer, Lara Warner.

While these latest blow-ups are certainly embarrassing, Credit Suisse hasn’t exactly covered itself in glory in recent years. A little more than a year ago, former chief executive Tjiane Thiam was ousted due to a high-profile espionage scandal. Gottstein replaced him as CEO, but may be regretting it now.

The bank has been associated with a number of controversial clients including Luckin Coffee, a Chinese coffee chain that filed for bankruptcy in February after an accounting scandal hit last year. That’s not to mention scandal-hit German fintech Wirecard.

Credit Suisse also had to write down $450m on an investment in hedge fund York Capital and the bank has also been sued by Mozambique due to its alleged role in a $2bn “tuna bond scandal – a scandal involving $2bn-worth of bank loans and bond issues issued to secret Mozambique state-owned firms.

How will the scandals affect Credit Suisse?

It has not always been doom and gloom. Brady Dougan, who served as the Swiss bank’s CEO until 2015, has long pointed out that the Swiss lender survived the 2008 financial crisis without a government bailout. And the appointment of Antonio Horta-Osorio, the current chief executive of Lloyds Banking Group as chairman, may help the bank to turn around.

But given past and ongoing scandals, Osorio faces a herculean task in transforming the bank’s image.

As Christian Hunt, founder of Human Risk and the former COO of Prudential Regulation Authority (a subsidiary of the Bank of England), notes about the Archegos losses: “Banks are designed to take risk, but to lose billions on one client is frankly astonishing. It just shouldn’t happen,” he tells City AM. “What’s particularly worrying is that this type of error has plenty of precedents that should’ve served as a warning.”

What’s happened?

Greensill Capital was in the “supply-chain finance” business – a modern spin on a well-established payment system known as reverse factoring. It involves intermediary lenders (such as Greensill) earning a small fee on loans that allow purchasing companies to smooth out their spending and suppliers to get paid more quickly if they accept a fractionally lower payment. It’s a legitimate business, but opaque and unloved by regulators since it can be used to disguise spiralling borrowing. Greensill was one of a handful of firms that made the basic concept more risky by selling off loans in order to write more, and packaging supplier debt into bond-like investments. In Greensill’s case, the major customer of the packaged loans was Credit Suisse, which put them into funds sold to outside investors. This risky model unravelled after the insurers covering Greensill’s mounting credit risk decided to end the cover – and no other insurers could be found.

How was David Cameron involved?

During Cameron’s period as prime minister, the finance firm’s Australian founder Lex Greensill worked as an adviser to the government on using supply-chain finance to improve procurement and save public money. His champion within government was the late Jeremy Heywood, a top mandarin who served both parties with distinction and was widely respected – and who knew Greensill from a period when he left the civil service and was working at Morgan Stanley. Cameron now says he thinks he met Greensill only twice as PM. But in 2018, once Cameron had been out of office for two years – the period required under parliamentary rules – he joined Greensill as a paid adviser. It’s not known what he was paid; unconfirmed reports suggest he was given shares potentially worth tens of millions if Greensill had listed, though Cameron says “their value was nowhere near the amount speculated in the press”.

What lobbying did Cameron do?

In the activities we know about so far, the ex-PM contacted four ministers, plus other officials, to lobby for Greensill on two fronts. First, he lobbied Chancellor Rishi Sunak and two other Treasury ministers – Jesse Norman and John Glen – to try to gain access for Greensill to a Bank of England coronavirus soft loan scheme. When this proved unsuccessful (despite Sunak agreeing to “push” officials to look at the case), Cameron contacted a senior adviser at Number 10, Sheridan Westlake, to complain. Second, he directly lobbied the health secretary, Matt Hancock, over “private drinks”, on Greensill’s plans for an NHS wage-payment scheme.

Did Cameron do anything wrong?

It was widely reported last month that Cameron had been “cleared” by the lobbying watchdog. But that’s a generous gloss on what they actually said. In fact the Registrar of Consultant Lobbyists simply concluded what is acknowledged by all parties: that Cameron was acting as a paid employee of Greensill, not as an external lobbyist – meaning his activities were beyond the watchdog’s remit. Cameron complied with rules for ex-ministers in that he waited two years before taking up his lobbying job with Greensill. But there is more to this affair than whether lobbying rules have been broken – it’s about whether those rules are fit for purpose. “It is about politicians trying to subvert normal processes by using their influence and the old pals’ act,” says The Sunday Times. “It’s about trying to bypass and intimidate a civil service whose job it is to avoid the misuse of public funds, on the principle that if a minister can be persuaded, officials will find it hard to resist. It is not the British way, and it stinks.”

Hence the inquiry?

Boris Johnson has announced a very limited six-week inquiry into what he called “this supply-chain finance stuff”. The lawyer conducting it, Nigel Boardman, is a highly respected former senior partner at Slaughter and May. But if the review is to have any real credibility, says Larry Elliott in The Guardian, then it needs to address several questions: “Is the current system of lobbying unsavoury and helping to create a culture of cronyism?” Should former politicians be banned from lobbying on the behalf of business, and does the current ministerial code need to be tightened to cover all approaches made to senior ministers, “and their response to them?”. While Johnson might enjoy – as one former minister put it – “throwing Cameron under a bus”, says Ross Clark in The Daily Telegraph, there’s a risk of opening “a Pandora’s box” that both he and Sunak might wish they had kept closed. This government is less than 18 months old, but “already mired in sleaze”, says Gaby Hinsliff in The Guardian. Once the narrative of Tory sleaze gains traction, it could be very hard to shift.

How should lobbying rules be tightened?

One of the more bizarre aspects of the affair is that Cameron hasn’t only embarrassed himself, he has embarrassed professional lobbyists. “When a former prime minister lobbying ministers who are his former colleagues is not covered by the Lobbying Act that he himself introduced in order to uphold public confidence in the democratic process, then it is surely obvious that the Act is not fit for purpose.” That is the view of Francis Ingham, director-general of the Public Relations and Communications Association (and ex-Tory councillor) writing on ConservativeHome. Ingham suggests three changes. First, broaden the Lobbying Act so that it covers anyone paid to lobby (such as Cameron), not just third parties (professional lobbyists). Second, deepen it, to cover special advisers and senior politicians, as well as direct contact with politicians. Third, create an externally enforced code of conduct, compelling lobbyists to publish details of all their clients. The lobbying industry will welcome the scrutiny: lobbying scandals have involved no lobbyists, just ex-cabinet ministers doing a bit on the side.

What’s happened?

The London-based finance firm Greensill Capital, one of the world’s biggest providers of supply-chain finance (letting firms borrow to pay suppliers), filed for administration on Monday, saying it was in “severe financial distress” and unable to pay back a $140m loan called in by Credit Suisse, its main backer. It also said it had been hit by defaults from a key customer, GFG Alliance, the global metals and commodities group run by Sanjeev Gupta, which was itself looking financially unsteady and in talks with lenders this week. Greensill’s filing for administration – and potential bankruptcy – marks an astonishing unravelling of a company with close ties to the British establishment (David Cameron is an adviser) and which SoftBank backed to the tune of $1.5bn in 2019. There have been rumours of trouble for months, and the crunch came last week, when Greensill’s main insurer refused to renew a $4.6bn contract and Credit Suisse froze $10bn of funds linked to the firm. It’s bad news not just for Greensill, but potentially for its customers, some of whom may now also be at risk of going under, threatening tens of thousands of jobs worldwide.

Any buyers on the scene?

According to Greensill’s administration filing, there was only “one credible bidder”, the US private-equity firm Apollo Global Management. Apollo wanted to pay $59.5m for Greensill’s intellectual property and IT systems, in a bid that would involve keeping “the majority” of Greensill’s 500 UK employees. On Wednesday Bloomberg reported that the deal was on the verge of collapse, due to a stand-off with one of Greensill’s key technology providers, the US tech company Taulia. Apollo was only interested in acquiring those parts of Greensill that would give it access to financing lines with large companies such as Vodafone, says the Financial Times. The group had no interest in taking on any financing for Greensill’s largest customer, Gupta’s GFG Alliance. The key sticking point is that, although founder Lex Greensill talked up the firm’s tech prowess, it was ultimately heavily dependent on other companies’ platforms.

Who is Lex Greensill?

He’s the son of a sugar-cane farmer from Australia who put himself through business school in London, built an innovative fintech business, and swiftly found himself at the heart of the British establishment. Now aged 44, Greensill came to the UK in 2001, and in his 20s worked at Citigroup and Morgan Stanley. There, a close colleague and mentor was the late Jeremy Heywood, an ex-mandarin who later returned to government under Gordon Brown, and served as cabinet secretary under David Cameron and Theresa May. After setting up his business in 2011, Greensill became an adviser to the Cameron government on supply-chain financing initiatives in the public sector. After leaving office, Cameron then became an adviser to Greensill, one of very few commercial opportunities he took up. Its collapse is a major financial blow to the ex-PM, who (according to media reports) has stock options worth up to 1% of the business.

What exactly is “supply chain finance”?

The idea is to let big companies smooth out their outgoings and let smaller companies get paid quicker – all courtesy of intermediaries such as Greensill, who lend the money and take a tiny margin. But Greensill is one of a group of businesses that have put a further spin on the idea by selling off loans in order to write more, and packaging supplier debt into bond-like investments. In Greensill’s case, the major customer of the loans was Credit Suisse, which put them into funds sold to outside investors.

That’s beginning to sound risky?

Indeed. Last week Credit Suisse and the other core customer, fund manager GAM, suddenly announced they were freezing the funds, having experienced “default events”. The key to understanding the Greensill crisis is insurance, says Tom Braithwaite in the FT. With insurance covering the credit risk, investors could treat the funds as almost risk-free. But we now know that last summer Greensill’s main insurers, Tokio Marine, got cold feet and sacked the executive covering Greensill for “exceeding his authority” in writing almost $7.7bn of coverage. This year Greensill has failed to find willing insurers and last week failed in a legal effort to force their previous ones to renew the policies. Without insurers to cover Greensill’s credit risks, it’s stuck: unable to offload loans or write new ones. That’s “inconvenient for blue-chip customers such as Vodafone”, says Braithwaite; it’s “potentially devastating for lesser companies” such as those associated with metals magnate Gupta, which are among Greensill’s biggest borrowers.

Is this the end for supply-chain finance?

Supply-chain financing is entirely legitimate, and Greensill’s services were used by financially robust big businesses including Vodafone and AstraZeneca. But regulators and rating agencies regard it as worryingly opaque. Companies using such facilities are able to classify the monies owing as “accounts payable” rather than debt – and thus the system can be (and is) misused to disguise spiralling borrowing. In 2018, for example, Carillion collapsed with about £500m in “other payables” linked to supply-chain finance debts. Greensill itself has avoided regulation by the Financial Conduct Authority as it lends to businesses, not consumers. But MPs and others are now asking whether that’s sustainable.

What happens next?

Expect a lot of questions in the coming weeks – especially if Greensill’s collapse is followed by the implosion of Gupta’s empire. “Shareholders will suffer if supply-chain accounting loopholes are not closed,” says Katherine Griffiths in The Times. “Thousands of people’s jobs now depend on how sound Gupta’s finances really are.”

Swiss regulators announced last week that they were escalating an investigation into a corporate espionage scandal at Credit Suisse, says Kalyeena Makortoff in The Guardian. Credit Suisse has already admitted hiring private detectives to track two former executives: Iqbal Khan, the former head of the bank’s wealth management division, and former head of human resources Peter Goerke. While Credit Suisse has tried to reassure investors that the scandal has not affected its business, it has already been forced to sack chief operating officer Pierre-Olivier Bouée, while CEO Tidjane Thiam (pictured) was forced to resign.

The scandal is unlikely to hurt the bank’s bottom line, since Swiss regulators don’t have the power to issue fines, say Harry Dempsey and Owen Walker in the Financial Times. But this is just the latest in a “series of revelations” about the group’s involvement in “risky business”, which also includes its exposure to the collapse of fraudulent German payments group Wirecard.

The spying scandal raises “wider questions” about governance and a “toxic culture” where the board seems to have “lost control”, says Lucy Burton in The Daily Telegraph. One person “who might have the answers” about how to move on from such problems is Richard Meddings, who was appointed to Credit Suisse’s board of director in April. Meddings has been involved with trying to deal with the fallout of scandals at Deutsche Bank, which was fined $7bn by US authorities, and TSB, which was involved with “one of the sector’s worst IT meltdowns in recent history

Let's cut straight to the chase.

If Europe is all about Mario Draghi vs the Germans, then this is a case of "Mario 1, Germany nil points'".

He looked unusually cheerful when he arrived on stage late (held up by the lifts, apparently).

Then the boss of the European Central Bank told everyone that he's going to pump €60bn a month into the markets. He's going to do it until at least September 2016. But it'll "be conducted until we see a sustained adjustment in the path of inflation."

In other words, this is open-ended if it needs to be.

Also, the amount of money being printed is significantly higher than the leaked €50bn that we heard about yesterday (maybe the ECB was doing some kite-flying to gauge the market's reaction).

Did this do the job? It depends on what job you want or expect it to do.

If you expect it to save the entire eurozone economy from deflation, high unemployment, and extreme misery well, no, it won't. Quantitative easing (QE) elsewhere in the world hasn't really achieved that.

But if you expect it to drive bond prices up (and yields down) and to drive share prices higher then yes, it seems to be working.

It's also kept the euro down, which is of course the quickest way that this can help the real' economy, by helping exporters for example.

We've always said that QE was likely in Europe and that it was likely to be good for asset prices. So we'd stick with our suggestion to buy Europe and if you want to know what stocks to buy, get hold of the latest issue of MoneyWeek magazine, out on Friday.

If you're not already a subscriber, you can get your first eightissues free right now but act quickly, that deal won't last forever.