Fiona Mullaly, Sinyeong Park, Hoang Nam Nguyen, Arthur Omont, James OSullivan, Claus Michaelis

May 2014

Everything is great...

E. Stanley ONeal (former CEO Merrill Lynch)$35 million bonus in 2007 superb performance in mortgage business

...until its not

arthur

banks are different from industries in the way performance is measured. with banks we need to talk about risk+capital management the same way we talk about budgeting and costs at manufacturing firms...

Regulatory pressure (1/2)CS falls under the jurisdiction of Switzerlands financial authority (FINMA) and national bank (SNB) as well as European and United States regulators which have all pushed for stronger internal performance measurement and control.

For overall firm performance monitoring, in Dec. 2010 CS has implemented Basel III and national regulator recommendations including: Basel III: Required minimum capital ratios, contingency planning in

case of liquidity crisis, improved value-at-risk and leverage metrics for the firms trading book

Regulator reporting: in June 2012, SNB recommended CS accelerate its resilience strengthening program and significantly increase loss-absorbing capital

Regulatory pressure (2/2) For performance measurement of staff, regulators have relied on fines

and additional reporting to ensure companies such as CS improve individual control systems: Fines: CS to pay upward of $885m to settle with US authorities

regarding the mis-selling of mortgage-backed securities pushing towards better control systems

Additional reporting: particularly comparing CS to UBS has led to improved internal controls. This is an industry-wide trend with regulator disclosures pushing firms to hire greater numbers of controllers.

Notably, the only person to be imprisoned by the US Dept. of Justice in relation to the financial crisis was a CS executive, leading to additional scrutiny of the firm.

Problem Statement

How has performance measurement & management at Credit Suisse evolved after the

financial crisis?

another slide to introduce nam s part

Pre-crisis Performance Measurement

Performance largely tied to Earnings and ROECapital management simply a metric of Tier 1 capital ratio

CS Q1 2007 Earnings Report

Today

CS Q1 2014 Earnings report - Capital & Leverage metrics beyond Tier 1 capital ratio

Today

Significant emphasis on Capital, Leverage and Liquidity Management vis--vis Earnings

Liquidity Management

Capital Management

Leverage Management

Working Capital Management

Investment & Budget Management

Actual Application at Credit Suisse

Capital, Leverage and Liquidity metrics across divisions

The rise of RWA (Risk-Weighted Assets)

- Includes off-balance-sheet exposures- Adjusted for different risk levels of different assets- Reflects a more accurate picture of a banks real balance-sheet

Economic Capital

Sales

Sales (Before Crisis)

Fuck the clients. Youre only responsiblity is to put meat on the table. [...] Name of the game: Move the money from your clients pocket into your pocket

Right, but if you can make the client money at the same time, it is advantageous for everyone, correct?

No.

Sales (Before Crisis)

Performance measurement depends on the total sales volume

Example: CS salespeople receive 5% cut out of sales commissions generated by them

Sales (After crisis)

Sales (after crisis)

Our employees are assigned performance objectives that are aligned with the banks strategy. They are expected to place our clients at the center of all that they do.

Credit Suisse, 2014

Sales (after crisis)

Performance is measured:- Sales Volume- Client Satisfaction (grades by clients)Additionally:- delayed bonuses (more LT focus and ethics)

Sales (after crisis)

Delayed bonuses / Claw-back:- more long-term focus- incentives for legal and ethical behavior

Example: Some Credit Suisseemployees have to wait until2021 to receive some bonuses(can be clawed back)

conclusion/recommendaiton fiona

CS does this and that, should change this and copy that from bank xyz