Credit Suisse to Cut Hedge Fund Lending by Third After Archegos

Credit Suisse Group AG is planning to slash lending to hedge funds by a third after the Archegos Capital blowup cost the bank $5.5 billion and forced it to tap investors for additional capital.

The Swiss lender on Thursday said it’s conducting a review with a goal of “resizing and derisking prime brokerage and prime financing businesses,” confirming a Bloomberg News report two weeks ago. It plans to focus the business on clients that have relationships with other parts of the firm and will reduce lending to hedge funds by some $35 billion, Chief Financial Officer David Mathers said in an interview.

The losses -- among the costliest in the bank’s 165-year history -- have wiped out more than a year of profit, prompting it to tap investors for $2 billion in fresh capital, and raised questions about Gottstein’s future after little more than a year in the role. The implosion of Bill Hwang’s family office is the latest reckoning for lenders chasing the lucrative business of catering to hedge funds, which present the potential for both outsized gains and huge losses, magnified by large borrowing.

“Clearly this loss came as a big surprise,” Chief Executive Officer Thomas Gottstein said on a call with analysts. “We are taking measures that this will not reoccur, we are reducing our exposure in that business and we are doing an investigation how it exactly happened.”

Prime-brokerage divisions cater specifically to hedge funds, lending them cash and securities and executing their trades, and the relationships can be vital for investment banks as well as being a significant source of revenue.

Credit Suisse, one of the biggest prime brokers among European banks, has already moved to tighten financing terms with some hedge funds, and hopes changes to the unit can allow it to forgo major cuts to other parts of the investment bank, Bloomberg reported earlier.

“Is it an isolated case?” Gottstein said. “I definitely hope it is and I think it is, but we are obviously reviewing the entire bank now just to make sure that our risk processes and systems are where they should be.”

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