Model tweaks, asset cull helped Credit Suisse cut RWAs in Q3

Credit Suisse slashed risk-weighted assets (RWAs) by almost 5% through the third quarter, after trimming its loan book and fine-tuning internal models used to gauge borrower creditworthiness.

Total RWAs stood at Sfr285.2 billion ($312 billion) at September 30, down Sfr14.1 billion on three months prior.

Credit RWAs drove the overall decrease. These dropped quarter on quarter by 3% to Sfr206.6 billion. The bank said Sfr4.2 billion of reductions were achieved by shrinking its loan book, and another Sfr2.5 billion after updating internal models and recalibrating their parameters. An improvement in loan quality deducted Sfr474 million. Favourable foreign exchange movements lopped off a further Sfr3.1 billion.


These savings were offset somewhat by a Sfr2.8 billion addition to RWAs caused by methodology and policy changes, primarily related to the phase-in of the new standardised approach to counterparty credit risk (SA-CCR). The bank said it expects this to have a further inflationary effect on RWAs in Q4.

Market RWAs dropped the most percentage-wise. Quarter on quarter, these fell 22% to Sfr17.2 billion. Credit Suisse said “risk mitigation” measures taken by its investment banking unit contributed to this. A drop-off in trading risk indicators also helped. The bank’s one-day management value-at-risk dropped 41% to Sfr47 million quarter on quarter.

Operational RWAs dropped by 3% to Sfr61.4 billion – a saving of almost Sfr2 billion, entirely driven by forex movements.

The quarterly reduction in RWAs contributed to a 50-basis point increase in Credit Suisse’s Common Equity Tier 1 (CET1) capital ratio to 13%.

What is it?

RWAs are used to set minimum capital requirements for banks. Credit assets, such as loans, are assigned a risk-weighting to generate their RWA value. The riskier the loan, the higher the RWA. Market RWAs are set using value-at-risk measures and other gauges of trading risk. Operational RWAs are set using banks’ own models or regulator-set formulae.

SA-CCR replaces the Basel Committee’s previous standardised CCR methodology, known as the current exposure method. It’s designed to be more risk-sensitive than its predecessor and to clearly differentiate between margined and non-margined trades, as well as recognise netting benefits.

Why it matters

Credit Suisse is in a position most banks would envy. The creditworthiness of its loan portfolio has held up despite the trials of the coronavirus-ravaged economy, meaning RWA savings made from shrinking its book were not offset by a change in default risk.

The situation was different as UBS, where souring loans added $676 million to credit RWAs over the quarter. Variations between the two banks’ portfolios clearly had a part to play in their divergent experiences, but there’s also the question as to whether Credit Suisse’s internal ratings-based model assessed borrower risks differently. 

At the very least, it’s clear that model refinements helped crush its credit RWAs last quarter. These may continue to help keep a lid on RWA expansion if borrower creditworthiness does start to deteriorate later on down the road.

It may also give the bank the capital needed to make riskier credit bets. Leveraged finance exposures totalled $6.2 billion at end-September, still a far cry from pre-pandemic levels, but more than double the previous quarter’s $3 billion.

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