2. PART I
2 Financial highlights 2000
4 To our shareholders
PART II
6 An overview of Credit Suisse Group
6 Organisation
8 Financial review
11 Strategic review
PART III
13 Review of business units
16 Credit Suisse Financial Services
23 Credit Suisse Private Banking
25 Credit Suisse Asset Management
27 Credit Suisse First Boston
PART IV
30 Credit Suisse Group Risk Management
PART V
50 Consolidated financial statements
PART VI
107 Parent company financial statements
118 Five-year summary of selected
financial data
120 Management
126 Main offices
127 Information for investors
3. CREDIT SUISSE GROUP RISK MANAGEMENT
Introduction rather their diligent implementation:
Financial services – put in a simplified implementation is what makes a com-
framework – consist of four basic pany stand out and determines its
elements: information, transactions, success or failure. While risk manage-
capital and risk. ment will never be “finished” in a com-
Nowadays, information is instantly plex and evolving financial environ-
Hans-Ulrich Doerig available, ubiquitous and increasingly ment, we aim to institutionalise learn-
Vice-Chairman of the cheap. Simply owning information is ing and stay at the edge of “best
Executive Board and not enough – only by packaging and practice”.
Group Chief Risk Officer interpreting it intelligently and provid- At Credit Suisse Group, we differ-
ing value-enhancing advice and deci- entiate between eight tiers of risk tak-
sion-making support can a company ing, approval and control:
Credit Suisse Group, including its differentiate itself from the competi-
business units, pursues a disciplined, tion. Tier 1: Business unit front line with
comprehensive and integrated The volume of transactions has prime responsibility for taking and
approach to risk management. Signifi- grown dramatically in recent years managing risks.
cant personnel and technological around the globe. New technologies
resources are focused on ensuring are expanding rapidly, making it even Tier 2: Independent business unit
that Credit Suisse Group remains a more important that in-house and support and approval functions includ-
leader in risk management. By means out-sourced processes are cost ing product control, strategic risk man-
of a proactive risk management effective. agement, counterparty analysis and
culture and the appropriate qualitative On today’s open, deregulated cap- approval, legal and compliance with
and quantitative tools, the Group aims ital markets, basic access to capital is focus on specific risk areas – all inde-
to minimise the potential for unde- no longer an issue for well-run estab- pendent from front line.
sired risk exposures and to optimise lished companies. The challenge is to
the allocation of capital throughout allocate capital optimally to the differ- Tier 3: Group functions such as over-
the Group to the benefit of share- ent activities within the organisation. all risk management, control and chal-
holders and other stakeholders. Risk is uncertainty about a future lenging the business units.
outcome. It is the essence of financial
institutions’ activities. Risk is multifac- Tier 4: Senior management at busi-
eted, complex, often interlinked and/or ness unit and group level as well as
context-driven. While not avoidable, supervisory boards with focus on the
risk is to be managed, not feared. overall risk profile.
Intelligent, informed risk taking is the
key. Risk is not only about “downside” Tier 5: Independent internal and ex-
and threats, but also about chances ternal audit with focus on assessments
and opportunities. Taking no risks is and deficiencies.
potentially the approach which pres-
ents the highest risk. Tier 6: Rating agencies – comparison
Good risk management has with competitors.
become a decisive competitive advan-
tage. It helps to maintain stability and Tier 7: Regulators – supervisors with
continuity and supports revenue and the role of an “external referee”.
earnings growth. Disciplined and intel-
ligent risk taking is an “attitude” Tier 8: Shareholders and other stake-
towards stakeholders. holders as ultimate overall and daily
Our research and observations in judges.
the financial services industry have led
to the “12 organisational principles in
risk management” which serve as our
general framework in risk manage-
ment (see chart on page 32). To apply
these primarily organisational princi-
ples, consistently and globally is our
continuous aim. The basis is not the
intellectual level of the principles, but
30
4. Risk management framework come of the mix of doing the right plined culture by promoting integrity
The Group has established a frame- thing and doing things right over an and high ethical standards, clear lines
work allowing comprehensive and extended period. Strategy and of responsibility and accountability,
effective risk control. The chart below reputation/brand risks can be made segregation of duties, appropriate
entitled “Risk Management Frame- transparent with methods like relative supervision by senior management,
work” illustrates the three main ele- stock performance, relative stock price and strong control systems.
ments of Credit Suisse Group’s frame- over book value, relative price earnings The Group’s monitoring systems
work. The underlying external and ratio, return on equity, net increase are based on a comprehensive set of
internal factors shaping the risk dispo- of number of clients or assets internal controls, with activities such
sition of the firm are shown on the left under management, attracting and as approvals, authorisations, compli-
of the graph. Then – based on the 12 keeping good staff and rankings of ance checks, and follow-ups on non-
core principles of good management – all sorts. compliance clearly defined at every
shown in the middle of the graph – the level of business. Internal and exter-
risk management organisation and risk Risk culture nal auditors are recognised by the
culture were established. Maintaining a Risk management is a multi-faceted Board as critically important agents,
firmwide risk management process process that extends well beyond an providing an independent check on
providing effective control over the organisation’s formal risk management the information received from line
major risks must be the ultimate goal. structure, its standards, processes, management. The chief auditor
Given its strategy, Credit Suisse methodologies and tools. The reports directly to the Chairman and
Group differentiates among seven mathematical/statistical quantification regularly communicates to the Board
priority risk categories as shown on the of risks and consequent setting of of Directors’ Audit Committee. Issues
right of the graph: market, credit, appropriate, common sense limits raised by the internal and external
insurance underwriting, commission represents only part of the integrated auditors are tracked systematically
and fee income and some operational approach to risk management. While and addressed comprehensively.
risks are already quantifiable or are Credit Suisse Group aims to stay in Group risk management represents
increasingly becoming so. the forefront of any relevant, credible an additional layer of risk manage-
Strategy risk deals with the exist- and cost-effective quantification of ment and control, challenging the
ing base of an institution and its risk, successful risk management is approach of the business units where
options, based on a what-if analysis. much more than producing a “risk or appropriate and relevant in the overall
Strategy is doing the right thing at the model figure”. The development and context. As an example, the Group
right time, and must be properly imple- maintenance of an appropriate risk and control system requires the follow-up
mented. This is an issue for all other control culture is at least as important on serious deficiencies not only by the
S's of an organisation, especially their as the most sophisticated quantitative business unit, but also by Group man-
synchronisation. Reputation risk is the risk models. agement.
aggregation of the outcome of all risks A key factor in risk management If a financial services group is
plus other internal and external factors is discipline, including discipline as to to achieve sustained success, confi-
based on facts, perceptions and compliance requirements. Credit dence and trust built over the years
expectations. Reputation is the out- Suisse Group encourages a disci- are vital. An excellent reputation is
Credit Suisse Group’s risk management framework
Major factors shaping the risk Scope and challenge of an Effective risk management
disposition of an individual and integrated firmwide provides focus on and control
an organisation risk management over 7 major risks
Values, society
Inn
& politics Building on the organisation’s 12 S:
ov a
· Strategy · Stakeholders
ion
Fa cts Strategy risk
tion
E xp · Structure · Shared values
etit
ion e
& te
· System/s · Skills
mp
ct a
pt
chn
· Simplicity · Symbols
e
Co
tion
Market risk
Perc
Action and · Safety · Sustainability
o
Credit risk
log
s
reaction by · Speed · Synchronisation
y
Insurance underwriting risk
management
Pol
Commission & fee income risk
Beha
ce
and staff Ensuring a risk culture with:
icie
Operational risk
rien
· modern methods/limits
vi o
s&
nts
pe
r · proactive risk management
Ex
u
Cli e
reg
Know ledge · constructive control attitude
Reputation/brand risk
ulat
· continuous training
ion
· discipline as to corrective actions
s
Markets & economy
www.credit-suisse.com 31
5. CREDIT SUISSE GROUP RISK MANAGEMENT
hard to gain, but easy to lose. Knowl-
edge, expertise, experience, integrity,
intellectual honesty and the daily con- The 12 organisational principles in risk management
duct of each employee, are crucial
elements that contribute to an institu- • No conflicts of interest:
While principles should hold firm
tion’s reputation. Thus, management independent reporting as to line
over time, the dynamics of financial
has to lead by example. versus back office/models/price
markets command a continuous ex-
amination of the principles based on checking/credit decisions/
Internal Code of Conduct
experience, observation and re- limits/etc.
One of the strengths of Credit Suisse
search. The issue is not the intellec- • Integration of risk, insurance, risk
Group is the competence and diverse
tual level of the 12 principles but mitigation and financial manage-
skills of its staff. Despite global diversi-
rather their diligent implementation. ment.
ty, our corporate culture has to be
The identification, measurement,
based on common denominators and
management and control of risks is
shared values. This has led to the 4. Rigorous disciplinary measures in
not a programme but a continuous
introduction of our internal group-wide case of non-compliance/
process.
Code of Conduct, approved by both breaches.
the Board of Directors and the Group • Know and play by the rules:
A. Executing the fundamentals
Executive Board at the beginning of everybody is aware of the conse-
2000. Especially in fast-changing 1. Risk is uncertainty about
future results. quences.
times, common values help to give the
• Risks must be respected, not • Responsibility for adequate
individual a sense of focus; they create
feared: symmetry between as- control environment not only with
identity and a sense of belonging.
pired gains and potential losses. immediate heads:
Spelling out our six ethical and six
it is a management issue at large.
performance core values and guiding • Risk=Opportunity:
principles on page 34, the Code of intelligent, informed risk taking
Conduct extends and supplements with corresponding risk/return. 5. Completeness, integrity and
existing compliance manuals, • Convergence of market directions relevance of data/information/
directives, guidelines and policies. much higher in turbulent times: systems as a base.
The complete Code of Conduct watch liquidity/flexibility aspects. • Management of risks is impossi-
applies to over 80,000 employees, ble without information about
and is available in 19 different them: also know what you do not
languages. 2. The guiding 6 S’s for the
know.
systematic mental discipline of
an organisation. • What is measured, observed and
rewarded gets attention.
• Strategy →structure→system(s),
simplicity→safety→speed. • Serious data show the following
characteristics:
complete, objective, consistent,
3. Discipline, clear structure, transparent, comparable across
allocation of responsibility the institution, interpretable,
and accountability are basic auditable, replicable, teachable
preconditions. and, above all, relevant and credi-
• Transparency as to policies, ble as to facts and perceptions.
procedures and manuals. • The data collection must be in a
• Discipline regarding strategy, reasonable cost/benefit or
tactics, control and compliance: cost/risk mitigation relationship.
“ownership” of issues and risks. • Credibly quantified and relevant
• Clear and communicated respon- risks represent an opportunity in
sibility and accountability for legal, an overall context:
incentive and implicit contracts. without credibility and relevance
of data/quantification, scepticism
and cynicism abound.
32
6. • Sourcing, sharing and storing of • “Reductio ad absurdum” may lead 11. Responsible control/risk culture
vertical and horizontal information to a “model figure” but most are as important as the most
is especially important in times of probably produces the wrong sophisticated risk management
staff turnover, restructurings and conclusions for the really relevant tools.
mergers. issue. • Only the mastering of all major
• Comparison of absolute model risk types contributes to a
B. Retaining perspective figures with those of third parties sustained excellent reputation.
is questionable; prime value • Mistakes or misjudgements are
6. Newness and/or complexity
added of a good model is the in- unavoidable:
of a project – combined with
ternal trend over time, assuming the ways of correcting them are
uncertainty – can add risks.
model consistency. part of culture.
• Simplicity for average human
beings. Complex structures, com- • Risk-return culture for everybody.
plex restructurings and systems 9. Risk management is a continuous • Ongoing motivation of staff and
require: process, not a programme. communication with all major
– break-up of problems; • Best practice and integrated ap- stakeholders.
– additional, continuous proach as targets. • Risk culture at large is the final
assessment; • Proper risk awareness for every- responsibility of top management
– anticipation and ability to one within holistic framework. and board of directors.
react.
• Regular checks on strategy,
structure, system(s), simplicity, 12. Human element is THE critical
7. Risk management is part art, part safety, speed. Continuous factor for success.
science. adjustments to new paradigms: • Good mix of professional, open-
• Facts, perceptions, expectations updated, major risks inventory. minded and honest people with
are all important; quantitative and • Focus on long-term initiatives ver- educational, professional and life
qualitative judgements are crucial. sus short-term ones: experience and integrity.
• Common sense: not minutiae, focus on integrated approach with • Professionalism includes “feel,
but relevance and credibility are emphasis on promotion rather intuition and inspiration for risk
the key. than on monitoring. and market direction”.
8. Limitation of models. C. Emphasising the human aspect
• Not all risks are relevant and/or 10. A financial institution is a
quantifiable, but risks which can- knowledge company.
not be measured directly often • Source, share, synthesise and
have indirect consequences for save knowledge: avoid brain
share price, growth, clients etc. drain.
• Models are always only part of an • Knowledge alone is not enough:
overall risk management the added value is generated by
approach. its implementation.
• Models are as good as underlying • Learn from mistakes, both
assumptions and information personally and institutionally.
input: • Culture of open communication
“garbage in – garbage out effect”. on “experience” and know-how,
• Be able to “read” the model: both horizontally and vertically.
never forget common sense. • Continuous learning as part of
evaluation/incentive process.
www.credit-suisse.com 33
7. CREDIT SUISSE GROUP RISK MANAGEMENT
12 core values for employees of Credit Suisse Group
Core ethical values Core performance values
Integrity Service
We realise that our global franchise is based on our core We are committed to providing superior service to our
ethical values and our long standing reputation for in- clients. We believe that knowing our clients and offering
tegrity, trust, confidentiality, fairness and professional- them value by combining good judgment, in-depth
ism. We respect the interests of our stakeholders knowledge and prompt and courteous service leads to
(clients, employees, shareholders, service providers, success.
government authorities, financial regulators, competi-
tors, media) and of society as a whole. Excellence
We are committed to excellence through continuous
Responsibility improvement of our management practices and know-
We honour our commitments and take personal respon- how. Problems or mistakes are viewed as a chance to
sibility for our actions. We promise only what we can improve.
deliver. We do not mislead our stakeholders.
Teamwork
Fairness We believe in achieving more for our stakeholders by
We believe in courteous and respectful treatment of our working together to draw upon our individual and collec-
stakeholders. We support equal opportunities and a tive strengths and abilities worldwide and across busi-
work environment free of discrimination and harassment ness lines.
of any sort.
Commitment
Compliance We recognise individual contribution to the current and
We acknowledge the importance of all relevant laws, future success of our firm and reward it objectively, tak-
regulations, policies and standards, both internal and ing into account the personal contribution to targets,
external, and comply with them. We are committed to governance and teamwork. Every employee contributes
exemplary management discipline and a first class her/his best to reach our common goals, by maintaining
control and compliance environment. focus and intensity of effort.
Transparency Risk culture
We seek constructive, transparent and open dialogue We base our business operations on conscious, disci-
with our stakeholders based on fairness, mutual respect plined and intelligent risk taking. We believe in inde-
and professionalism. pendent risk management, compliance and audit
processes with proper management accountability for
Confidentiality the interests and concerns of our stakeholders.
We treat confidential as such and do not disclose non-
public information concerning the Credit Suisse Group Profitability
companies, their clients and employees, unless required We are committed to sustained profitability which
by law. enables us to carry out our strategies, make long-term
investments, fairly compensate our staff and achieve an
attractive return for our shareholders. Legality, compli-
ance and our core ethical values, however, come before
profit.
34
8. Risk management governance and specialise on specific risks with legal entity Credit Suisse First Boston
The structuring of Credit Suisse Group the help of tailor-made management including investment banking and insti-
as a series of distinct business units – tools where appropriate and relevant. tutional asset management, and legal
introduced in 1996/97 – is designed Group-wide risk management ap- entity Credit Suisse Group as the hold-
to increase transparency, discipline and proaches are unified and thus applied. ing company of the aforementioned
accountability. Although the Group as It is our ambition to establish the global three legal entities. The same mem-
a whole is large, the new structure benchmark of a large, multifaceted bers of the Boards of the latter three
helps to make it less complex. Flexibili- financial organisation in regard to risk legal entities also serve as Members of
ty, the ability to focus and to react, as management structures, processes the Board of Directors of Credit Suisse
well as specialisation and closeness to and methods. This is not a programme Group as of April 2001.
the market are heightened. Thus, the but an ongoing process. At Credit Suisse Group, the risk
different business units can be meas- management governance structure
ured against the best of their respec- Group risk management governance begins with the Boards of Directors,
tive class. This aspect concerns four major legal including their Audit Committees
More importantly with a view to entities within Credit Suisse Group: le- which are – among other duties – re-
risk, the business unit set-up allows gal entity Winterthur for the insurance sponsible for determining the general
the Group to align risk types, focus on business, legal entity Credit Suisse for risk policy, proper checks and bal-
major risk categories and concentrate retail banking and private banking, ances, the strategic risk management
Credit Suisse Group risk management – general organisation
Credit Suisse Group
Internal/External Audit
Board of Directors
Group Chief Executive Officer
Group Executive Board
Group Chief Risk Officer Group Chief Financial Officer
Group Risk Processes & Risk Management
Provisions Committee Legal & Compliance IT Executive Board
Standards Committee Committee
Group level
Board of Directors/Audit Committee Board of Directors/Audit Committee Board of Directors/Audit Committee
Winterthur Credit Suisse Credit Suisse First Boston
Legal level
Credit Suisse Financial Services
Winterthur Winterthur Credit Suisse Credit Suisse Credit Suisse Credit Suisse
Insurance Life & Pensions Banking 1) Private Banking Asset Management First Boston
Chief Executive Officer
Chief Executive Officer Chief Executive Officer Chief Executive Officer Chief Executive Officer Chief Executive Officer
& Vice-Chairman
Executive Board Executive Board Executive Board Executive Board Executive Board Executive Board
Chief Investment Chief Investment
Risk Risk Investment Risk
Officer Officer
Committees Committees Committees Committee
Investment Committee Investment Committee
Chief Credit Officer
Chief Risk Officer Chief Risk Officer Chief Credit Officer Chief Credit Officer Risk
Strategic Risk Officer
Risk Managers Risk Managers Risk Managers Risk Managers Managers
Risk Managers
Legal & Legal & Legal & Legal & Legal & Legal &
Compliance Compliance Compliance Compliance Compliance Compliance
1)
Credit Suisse Personal Finance and Credit Suisse e-Business have an analogous structure.
Business unit level
www.credit-suisse.com 35
9. CREDIT SUISSE GROUP RISK MANAGEMENT
organisation and the Group’s overall strategy together with the risk subject to constant reassessment and
appetite for risk. They are also respon- management units at the individual improvement to ensure that implicit
sible for reviewing major risk expo- business units. risks in the evolving financial markets are
sures on a regular basis. The simplified The Group Chief Financial Offi- captured and appropriately managed.
organisational set-up is presented in cer deals with Group-wide IT issues –
the chart “Risk management – general including risk related IT access, and Market risk – overview
organisation” on page 35. security issues – and chairs the regular The term market risk refers to the risk
The daily risk management respon- meetings of the IT Executive Board. of potential loss arising from adverse
sibilities on Group or Corporate Center effects on interest rates, foreign-cur-
level are set up as an additional layer Business unit risk management rency exchange rates, equity prices,
of risk management and control, har- governance and other relevant market rates and
monising relevant risk management is- While the business units are exposed prices, such as commodity prices and
sues which can and should be brought to all risk types in one way or another, volatilities. A typical transaction may be
to a common denominator. The prime their relative significance varies sub- exposed to a number of different mar-
value added is the challenging of busi- stantially by design. Trading book mar- ket risks. Credit Suisse Group defines
ness units and the overall control and ket risks are concentrated at Credit its market risk as potential changes of
overview, while duplication of efforts is Suisse First Boston, while credit risks fair values of financial instruments in
avoided. are most important at Credit Suisse response to market movements.
The Group’s Executive Board Banking and at Credit Suisse First At Credit Suisse Group, the
Risk Management Committee Boston. Insurance underwriting risks consolidated primary market risk expo-
includes all Executive Board Members are exclusively found at Winterthur, sures in the trading portfolios at
and is chaired by the Group Chief while commission income risks domi- end-2000 were interest rates, equity
Risk Officer (GCRO). It prepares risk nate at Credit Suisse Private Banking prices, and foreign exchange rates.
issues for approval by the Boards of and Credit Suisse Asset Management. Exposure to the Swiss franc exchange
Directors. It also reviews the Group’s All business units are exposed to rate of the US dollar and the euro as
exposure to different categories of operational, reputation/brand and well as to equity price levels in West-
risk, assesses potential opportunities strategy risks. ern Europe and North America consti-
and risks, initiates corrective actions to The strategies of each business tuted major elements of Credit Suisse
mitigate undesired risk exposures and unit and of the Group are discussed on Group’s market risks embedded in the
reviews the allocation of capital. The the highest levels at least once a year. non-trading portfolios or banking
Group Risk Processes & Standards The business units of Credit Suisse books.
Committee (GRIPS), chaired by the Group are – by design – substantially The most important tools used to
GCRO, also meets four times a year autonomous, and are thus responsible measure and manage market risk
to define the overall Group risk and for the implementation of their own exposures include the following:
capital policies and to approve general risk management. To exercise this
instructions, processes, standards, authority responsibly, each of the busi- • The Value-at-Risk (VaR) method
methods and tools concerning risk ness units has its own consistent risk to estimate the potential loss aris-
management at business unit level, or management framework subject to ing from a given portfolio for a pre-
to unify these where Group-wide regular checks and challenges by determined probability and holding
appropriate and relevant. The GCRO Group management. period, using market movements
chairs the quarterly Provisions Meet- Each business unit has its own based on historical data.
ing, where the status and develop- specialised risk management structure • The scenario analysis to estimate
ment of credit allowances at business and systems in place – including risk the potential immediate loss after
unit level are discussed and chal- committees, appropriate tools, sys- stressing market parameters.
lenged. In addition, the GCRO is tems, procedures and controls – spe- These changes are modelled on
responsible for the development, cially tailored to cope with the risks past extreme events and hypotheti-
implementation, monitoring and taken in its particular line of business. cal scenarios.
managing of risk Iimits as well as for At every level of the risk management • Other models measure interest
strategy, standards, procedures and process – especially in regard to mar- rate sensitivity risk, default risk
risk reporting. Group Risk Manage- ket and credit risk – measurement and and economic risk capital for cer-
ment supports the GCRO in fostering monitoring functions are independent tain complex activities. Regular as-
general risk awareness throughout the of the respective front-line office being sessments of mark-to-market
Group and in harmonising approaches monitored. revaluations of all balance sheet
to manage risk types across business At Credit Suisse Group, risk man- positions and interest rate rotation
units. It also monitors the implementa- agement organisation and systems as scenarios are the basis for these
tion of the Group’s risk management well as policies and techniques are analyses.
36
10. The major modelling techniques are ucts, including derivatives such as The estimates provided below are
described in more detail at the end of swaps, futures, options and structured shown in Swiss francs, the base cur-
this disclosure section, on page 46. products (customised transactions rency in the VaR calculations of two of
using combinations of derivatives are the three business units using VaR;
Market risk exposures of Credit executed to meet specific client or Credit Suisse First Boston manages
Suisse Group business units and the proprietary needs). With such a broad market risk utilizing VaR calculated on
corporate center – trading portfolios spread of products and markets, the US dollar as the base currency. In
The distribution of trading portfolio Credit Suisse First Boston’s trading the table below the spot exchange
related market risks reflects the distri- strategies are diverse and variable, and rates of 31 December 2000 and
bution of activities among the different exposure at any given time will gener- 31 December 1999 were applied. The
business units. Trading activities and ally be spread across a wide range of table provides an overview of the VaR
the associated market risks are risk factors and locations. estimates in the material trading port-
focused primarily within Credit Suisse The business units with trading folios as of 31 December 2000 and
First Boston. Credit Suisse Private book activity perform a daily VaR 31 December 1999.
Banking and Credit Suisse Banking calculation to assess the market risk. Credit Suisse First Boston’s VaR
also conduct trading activities – albeit The calculations are based on a ten- declined by 48% in Swiss franc terms
on a much smaller scale – primarily day holding period with a 99 percent over the course of the year. Much of
driven by the need to offer a complete confidence level and risk movements that decline was due to the introduc-
product mix to their customers. Credit that are generally determined by two tion of a new historical simulation mod-
Suisse Asset Management and years of historical data. For many el which was approved for use in cal-
Winterthur – comprising Winterthur purposes, such as backtesting, the culating the regulatory capital for
Insurance and Winterthur Life & resulting VaR figures are usually scaled market risks by the Swiss Federal
Pensions – do not engage in trading down and presented as one-day hold- Banking Commission in the second
activities. ing period values, including those pro- quarter of the year. The estimates for
At Credit Suisse First Boston, the vided in this disclosure. Credit Suisse 1999 are restated to provide a basis
market risk exposures in trading and First Boston’s Risk Measurement & for comparison. The methodology –
non-trading portfolios are broadly Management (RMM) unit is responsi- adjusted VaR figures show that the
diversified as the company is active ble for updating and distributing the “real” market risk would be approxi-
in most of the principal traded markets risk parameters used in the calculation mately down 25% in US dollar terms
of the world. It is using almost all of risk exposures to the other business (Credit Suisse First Boston’s functional
common trading and hedging prod- units on a quarterly basis. currency) or down 23% in Swiss franc
terms.
Credit Suisse Group uses back-
testing to assess the accuracy of the
VaR model. Backtesting – the compar-
ison of daily revenue fluctuations with
Market risk exposures in trading portfolios: the daily VaR estimate – is the primary
Credit Suisse Group method used to test the accuracy of a
VaR model. Backtesting is performed
at various levels, from business unit
99%, one-day VaR; in CHF m
Credit Credit level down to more specific trading
Market risk
Suisse Suisse areas. While VaR models tend to gen-
Group 1) Group 1)
Exposure type 31 Dec. 2000 31 Dec. 1999
erate two to three outliers a year (days
when the trading loss exceeds the
Interest rate 235.7 284.5
respective VaR), Credit Suisse First
Foreign exchange 22.7 70.9
Equity 98.5 102.6
Boston had no outliers in four years of
Commodity 6.8 4.8 using the model for the calculation of
regulatory capital for market risks. VaR
Sub-total 363.7 462.8
figures should therefore be read with
Diversification benefit 204.7 257.5
an understanding of the conservative
Total 159.0 205.3 nature of the model.
1)
Two points are particularly note-
Credit Suisse Group does not manage its trading portfolios on a consolidated basis. The amounts provided in
this column represent arithmetic sums of the respective VaR estimates of the business units plus the expo- worthy in the development of Credit
sure of the Corporate Center. Management believes that this is a conservative representation of the overall Suisse First Boston’s market risk over
risk since possible diversification benefits between business units are not considered. However – as trading
portfolio-related market risks of some 85% of total VaR are concentrated at Credit Suisse First Boston – the
the course of the year 2000. First,
overstatement implied by this aggregation method is limited. Credit Suisse First Boston maintained
www.credit-suisse.com 37
11. CREDIT SUISSE GROUP RISK MANAGEMENT
Backtesting for Credit Suisse First Boston important to help understand risks dur-
ing periods of severe disruption. Credit
in USD m
Suisse Group performs scenario test-
50 ing to ensure that – even in good envi-
ronments – its exposure to particular
0 events remains well controlled.
–50 Non-trading portfolios
All Credit Suisse Group entities man-
–100 age the market risks in their non-trad-
ing portfolios (also known as “banking
–150
books” or “other than trading port-
folios”) through procedures and tools
–200
such as risk limits, independent moni-
–250
toring of risk from risk taking func-
1st quarter 2000 2nd quarter 2000 3rd quarter 2000 4th quarter 2000
tions, and limit excess resolution steps.
Sensitivity analysis is used to produce
Daily revenue
the risk quantification shown on the
One-day VaR (99%)
left. In non-trading portfolios, compris-
ing all non-trading books of the bank-
a disciplined approach and held the change reduced the degree of ex- ing business units – including private
level of market risks stable over the treme model conservatism, although equity investments – and the financial
year, even while absorbing the impact the model still remains conservative in investments of the insurance business
of Donaldson, Lufkin & Jenrette activi- nature – i.e. Credit Suisse First units, the major elements of market
ties in the fourth quarter. Second, Boston’s actual trading results are well risk during 2000 were exposures to
effective 31 May 2000, the Swiss within the VaR band even after the changes in the Swiss franc to US dollar
Federal Banking Commission adoption of the revised model. and euro exchange rates as well as
approved the revised VaR model for The VaR methodology is most equity instrument price levels in
use in the calculation of market risk useful for day-to-day risk monitoring Western Europe and North America.
capital. As illustrated by the Backtest- of trading books in the context of The table summarises the market risk
ing chart above, the methodology “normal” markets. Scenario analysis is exposures in non-trading portfolios
as of 31 December 2000 and
31 December 1999.
Credit Suisse Group’s business
Market risk exposures in non-trading portfolios: includes a substantial volume of non-
Credit Suisse Group trading-related banking activity both in
providing products and services to its
Potential change in fair value/market value; in CHF m clients and as proprietary investments.
These activities include equity instru-
Credit Credit
Suisse Suisse
ment participations, investments in
Market risk Group 1) Group 1) bonds and other money market instru-
Exposure type 31 Dec. 2000 31 Dec. 1999
ments, lending money and securities
Interest rates 2) (15.2) 24.8 and deposit-taking. The instruments
Foreign exchange 3) (62.5) (55.4) used for balance sheet management
Equity 4) (1,049.8) (627.8) include derivative instruments such as
Commodity 5) 0.0 0.0 swaps, interest rate swaps, forward
Total banking business units (1,127.5) (658.4) rate agreements and options.
Total insurance business units (2,514.1) (2,635.3) The financial investments of the in-
surance business are held to ensure
1)
For each exposure type, the given figures refer to the particular sensitivity generating the largest potential coverage for future obligations arising
loss for Credit Suisse Group as a whole. The Credit Suisse Group amount equals the sum of the respective
business unit amounts plus Corporate Center. from policies. The quality of these
2)
Assuming an adverse parallel yield curve shift for Credit Suisse Group of between 1.00% and 2.00%, assets is generally high – holdings are
depending upon both the level and volatility of the particular country’s interest rates.
3)
Assuming an adverse change for Credit Suisse Group of the CHF against all currencies of between 10% and primarily bonds with AA and higher
20%, depending upon the volatility of the particular country’s exchange rate. ratings, with an A rating being the mini-
4)
Assuming an adverse change for Credit Suisse Group in all equity instrument prices of between 10% and
20%, depending upon the volatility of the particular stock market.
mum requirement for new additions to
5)
Assuming an adverse change in all commodity prices of 10%. the portfolio. The Notes 22 and 23
38
12. “Financial investments from the banking also described at the end of this dis- 2000 ACP and credit provisions
and insurance business” of the consoli- closure section on page 49. Credit CHF m
dated financial statements on pages 80 Suisse Group implemented such a
900
and 81 provide an overview of book credit risk management framework for
and market values of these assets. the banking business units in Decem- 800
ber 1996. As this framework is used 700
Liquity and funding risk for management information purposes
600
Liquidity and funding risk is the risk only, it is not reflected in the consoli-
Credit Suisse Group or its business dated financial statements. Annual 500
units being unable to fund assets or credit provisions (ACP) equal expected
400
meet obligations at a reasonable or, in credit losses derived from actual his-
case of extreme market disruptions, torical average losses. The chart enti- 300
any, price. This risk is managed at the tled “2000 ACP and credit provisions” 200
business unit level, in line with our shows the ACP of the banking units in
general governance principles, which 2000 with the respective, actual credit 100
allows us to specifically tailor the provisions. Actual losses which occur 0
CSB CSPB CSFB CSAM* CSG
approach to the individual cash flow in any one year may be higher or lower
structure within the business units. The than these provisions, depending on 2000 ACP
Group Corporate Center monitors the the economic environment, interest 2000 Actual credit provisions
identification and measurement of this rates and counterparties’ performance. * Both ACP and credit provisions are well below
risk and works in partnership with all In addition to the expected loss, an in- CHF 1 m for 2000.
business units to foster sound liquidity dicative worst-case default loss,
management practices worldwide. shown in the chart on the right, is
calculated using CREDITRISK+, the
Credit risk – overview credit risk measurement and manage-
Credit risk is the risk that a borrower ment tool developed by Credit Suisse
(or counterparty) is unable to meet its First Boston. The 99th percentile worst-
financial obligations. In the event of a case default loss shown in the chart on
default, a bank generally incurs a loss the right is based on the 99th percentile
equal to the amount owed by the of the full credit default loss distribution.
debtor, less a recovery amount result- The difference between the worst-case
ing from foreclosure, liquidation of col- default loss and the ACP reflects the
lateral or restructuring of the company. unexpected loss level. The fourth as-
The majority of Credit Suisse Group’s pect of the credit risk management
credit risk is concentrated in the Credit framework is the pricing and optimisa- 99th percentile worst-case
Suisse Banking and Credit Suisse First tion of the portfolio and the considera- default loss
as of end-2000
Boston business units. The credit risks tion of risk and reward.
taken on by Credit Suisse Private Credit Suisse Group’s credit risk CHF m
Banking are mostly collateralised and management framework allows us to
primarily of an operational risk nature. price transactions involving credit risk
2000
Credit exposures exist in the banking more correctly by performing a risk/
business units within lending products, return calculation. The current imple-
commitments and letters of credit, as mentation of the credit risk manage- 1500
well as counterparty risk from deriva- ment framework covers virtually all of
tives, foreign exchange and other Credit Suisse Banking, Credit Suisse
transactions. Private Banking and Credit Suisse 1000
A system of individual credit limits Asset Management, as well as the
is the traditional means of managing majority of Credit Suisse First Boston’s
credit risk and preventing risk concen- credit-related exposures. The remain- 500
trations. A comprehensive set of ing portion of Credit Suisse First
country and regional limits is in place Boston’s credit-related exposures is
to address concentration issues in the covered by either VaR methodology – 0
CSB CSPB CSFB CSAM* CSG**
portfolio (see country risk). The third such as mark-to-market valuated real
1997 1998 1999 2000
aspect of the credit risk management estate portfolios, the majority of which
framework is an appropriate credit risk are earmarked for securitisation – or * Worst case loss for 2000 below CHF 2 m.
provisioning methodology, which is by applying credit risk adjustments. ** Based on combined portfolio.
www.credit-suisse.com 39
13. CREDIT SUISSE GROUP RISK MANAGEMENT
Credit Suisse Group banking units The business units of Credit Suisse fication of counterparties where
counterparty exposure by rating
Gross total of CHF 405 bn, as of end-2000
Group manage credit risks through a changes in creditworthiness could
credit request and approval process, occur due to events such as an-
CHF bn
Investment Grade 80% ongoing credit and counterparty moni- nounced mergers, earnings weakness,
140
Non Investment Grade 20%
toring and a credit quality reviewing lawsuits, etc. Possible recovery meas-
process. Credit requests are prepared ures are evaluated even before potential
120 by experienced credit officers, based credit losses might be incurred. In addi-
on analysis and evaluation of debtor tion, Credit Suisse Group and its busi-
100 creditworthiness and the type of credit ness units regularly analyse their industry
transaction. Credit decisions are taken diversification and concentration in
80
on a transaction-by-transaction basis selected segments. Credit protection
60
by credit committees and senior credit such as credit derivatives are used to a
managers at levels appropriate to the limited degree, in particular to mitigate
40 amount and complexity of the transac- some exposures with multinational
tions, as well as to overall exposures to companies.
20 counterparties and their related enti-
ties. These authority levels are set out Loans and loan equivalent portfolio –
0 counterparty exposure
R1 R2 R3 R4 non- R5 R6 R7 R8* Pro- within the governing principles of the
AAA AA A BBB ra- BB B CCC/ <C visi-
ted CC ons legal entities. Transactions of a signifi- Credit Suisse Group defines counter-
Internal ratings R1– R8 are approximately
cant and unusual nature are discussed party exposure as all positions, expo-
equivalent to the respective external ratings. with and/or ratified by the GCRO. sures and facilities that potentially gen-
* Potential problem and non-performing loans,
Credit exposures to individual erate a credit risk for the Group. This
including accrued interest. counterparties or segments thereof includes loans and loan equivalents
and adherence to the related limits are representing drawn exposures as well
monitored continuously by credit offi- as committed but undrawn facilities. It
cers, industry analysts and further spe- also includes market-driven exposures
cialists. In addition, credit risks are also like off-balance sheet transactions,
regularly reviewed by credit and risk such as derivatives and foreign-
management committees, by taking exchange transactions, as well as
current market conditions and trend letters of credit and guarantees. All
Credit Suisse Group banking units analysis into consideration. these instruments are converted by
counterparty exposure by industry The credit review process is using internal loan equivalent factors,
Gross total of CHF 405 bn, as of end-2000
designed to result in an early identifi- which are related to regulatory risk-
CHF bn cation of possible changes of the weightings. This approach represents
140
creditworthiness of our clients. These a more comprehensive definition of
procedures include regular asset and counterparty exposure, especially in
120 collateral quality reviews, business and comparison with other financial institu-
financial statement analysis of individ- tions which often emphasise lending
100 ual clients and economic and industry exposure only. The total gross counter-
studies. Other key factors considered party exposure amounted to CHF 405
80
include business and economic condi- billion as of 31 December 2000
tions, our historical experience, regula- (31.12.1999: CHF 373 billion).
60
tory requirements, and concentration A counterparty credit risk class
40 of credit volume by industry, country, system has been implemented by
product and counterparty rating. The Credit Suisse Group to define a frame-
20 process results in a quarterly determi- work that supports consistent credit
nation of the appropriateness of our risk analysis (statistical and otherwise),
0 allowances for credit losses and leads credit risk monitoring, risk-adjusted
Banks and brokers/financial services to the decision whether allowances performance measurement, economic
Individual clients
Real estate/construction
should be released or increased. The capital/usage allocation, and certain
Telecom credit committees of the business financial accounting purposes. The
Electricity units and the Group are responsible for establishment of a credit risk rating for
Public & defence
Retail trade such decisions. each counterparty is the first step in
Wholesale trade Another tool in use – particularly at evaluating the possible risk of credit
Oil & gas
Electronic equipment
Credit Suisse First Boston – is regu- losses. The counterparty credit rating
Others larly updated watch-lists for the identi- is used – in combination with credit (or
40
14. credit equivalent) exposures and re- In summary, Credit Suisse Group’s Credit Suisse Group banking units
exposure to selected emerging
covery rates – to quantify potential credit risk management framework markets by region and largest
credit losses. Each counterparty that comprises five core components: an individual country exposure of region
as of end-2000
generates potential or actual credit risk individual credit limit system; country
exposure for Credit Suisse Group is and regional concentration limits; a CHF m
rated and assigned a risk class. For credit risk provisioning methodology; a 9000
those counterparties identified as hav- pricing methodology; and an individual
8000
ing at least one impaired transaction, counterparty and country rating sys-
the counterparty is rated as either (I) a tem. The credit risk management 7000
potential problem loan, (II) a non- framework is refined constantly and si-
6000
performing loan or (III) a non-interest multaneously covers all business areas
earning loan. exposed to credit risk. 5000
The tables on page 40 show the 4000
breakdown of Credit Suisse Group’s Country risk
counterparty exposure by internal Country risk is the risk of a substan- 3000
rating classes and major industry tial, systemic loss of value in the finan- 2000
segments. cial assets of a country or group of
1000
The non-rated exposure amounting countries which may be caused by the
to some CHF 13 billion – 3.3% of inability or unwillingness of a sovereign 0
Africa/ Asia/ Latin Eastern
gross counterparty exposure – relates to meet contractual obligations and/or South China America/ Europe/
Africa Hongkong Brazil Russia
primarily to mark-to-market valued the imposition of controls on capital
residential and commercial real estate flows. Given the international character Net exposure/region.
whole loans of the former Donaldson, of their activities, all business units of Net exposure/largest country exposure
of region.
Lufkin & Jenrette portfolios destined Credit Suisse Group are exposed to
Exposure of insurance business below
either for securitisation or sale. The country risk, although the largest por- CHF 300 m.
chart also reflects the revised and tion by far is held at Credit Suisse First
refined Credit Suisse Group risk Boston.
ratings which entered into effect as of Country ratings and country limits
31 December 2000. are the two primary instruments used
The scale of Credit Suisse First by the Group to manage country risk.
Boston’s securitisation activities – Country ratings provide an assessment
where loans are housed temporarily of the risk of sovereign default. The in-
prior to securitisation or sale – in- dependent credit risk management de-
creased after the merger with Donald- partment (CRM) of Credit Suisse First
son, Lufkin & Jenrette. During the Boston – in cooperation with Economic
year, Credit Suisse First Boston also Research – periodically updates these
continued to improve liquidity and rating assessments. The ratings are
reduce risk in its existing commercial approved by the GCRO. Country limits
real estate lending portfolio by cap Credit Suisse Group’s exposure to
decreasing the size of less-liquid individual countries. They are supple-
elements in the portfolio by roughly mented by regional limits, which restrict
50% during the year, and also by the maximum exposure to a specific
substantially strengthening provisions region in order to limit the impact of
for this activity. contagion. Regional limits are lower
The maturity structure – on page than the numerical addition of all the
95, Note 38 of the consolidated finan- country limits of the respective regions.
cial statements – shows that 90% of The Board of Directors approves coun-
total current assets are due within try, regional and global limits. Within
12 months while only 4% are due after Credit Suisse First Boston, the Credit
five years or show no maturity. In addi- Policy Committee and Capital Alloca-
tion, approximately 60% of the total tion and Risk Management Committee
counterparty exposure is collateralised – in cooperation with the GCRO – peri-
by a variety of collateral types, including odically reviews these limits. In addition,
pledged deposits and securities portfo- the independent Risk Measurement &
lios, mortgages, standby letters of Management department (RMM)
credit, and guarantees. assesses exposures versus country
www.credit-suisse.com 41
15. CREDIT SUISSE GROUP RISK MANAGEMENT
Credit Credit Credit Insurance risk
Suisse Suisse Suisse Credit
Financial Private First Suisse
Protecting Winterthur Insurance and
Asset quality & Services Banking Boston Group Winterthur Life & Pensions from undue
31 Dec. 2000 31 Dec. 2000 31 Dec. 2000 31 Dec. 2000 risk accumulation is a core risk man-
provision development in CHF m in CHF m in CHF m in CHF m
agement activity. In order to understand
Non-performing loans (NPLs) 1) 8,236 111 1,479 9,826 the risk universe of an insurance com-
Capital provisions against NPLs 2) 5,142 60 989 6,191
pany, the flow of business and the ac-
Counterparty exposure 1) 127,310 38,265 239,640 405,215
companying flow of risks are analysed.
Coverage ratio of NPLs Premiums earned by selling insurance
31.12.2000 62% 54% 67% 63% policies are invested to cover claims
31.12.1999 60% 75% 84% 63%
occurring at a future date – sometimes
NPLs as percentage of counterparty
many years later. Therefore, the com-
exposure of business units
pany has to manage and limit insur-
31.12.2000 6.50% 0.30% 0.60% 2.40%
31.12.1999 8.70% 0.30% 0.90% 3.40%
ance risk – e.g. through reinsurance
contracts, financial market risks (see
1)
Includes loans and loan equivalents. market risk section) associated with its
2)
Excludes total interest of CHF 1,906 m (fully provided). assets and liabilities (reserves), and
risks associated with its assets and re-
limits. RMM and CRM provide inde- In determining the amounts of the insurance contracts.
pendent supervision to ensure that the allowances, loans and loan equivalents Asset accumulation by insurance com-
divisions operate within their limits. are assessed on a case-by-case basis, panies results predominantly from pre-
CRM also assumes responsibility for taking the following factors into con- miums paid earlier than claims are set-
actively managing these limits to reflect sideration: tled. The resulting time differences of
changing credit fundamentals. • The financial standing of the up to or even exceeding 50 years have
A gross counterparty exposure customer, including a realistic implications for risk management. First,
analysis by country rating category – assessment based on financial funds have to be invested in assets in
excluding exposures to supranationals and business information of the like- such a way that they generate cash
and diversified portfolios without de- lihood of repayment of the loan flows in line with the cash outflows em-
fined country risk assignment – shows within an acceptable period of time; bedded in the liability structure. Sec-
that approximately 87% are with inter- • The extent of Credit Suisse ond, product-specific characteristics –
nally N1-rated countries (equivalent to Group’s other commitments to the such as maturity, profit-participation
AAA) and 8% with N2-rated countries same customer; bonuses, or inflation-dependent insur-
(equivalent to AA) respectively, leaving • The fair value of any security for ance claims – have to be treated ap-
a balance of only 5% to lower-rated the loans; propriately.
countries. • The costs associated with obtain- The two Winterthur business units
The table on page 41 shows the ing repayment and realization of follow stringent guidelines, especially
Group’s cross-border exposure out- any such security. with a view to assuming insurance risk,
standing to selected emerging market the selection of risks and the sums
countries. Credit Suisse First Boston’s Driven by the Group’s selectivity insured. Winterthur operates two main
targeted exposure reduction in Russia regarding counterparties, the overall insurance businesses – non-life and
is largely completed; the remaining asset quality of Credit Suisse Group life – and faces several risk types
exposure has conservative provisions. remains solid – with approximately stemming from its underwriting activity.
80% of exposures rated investment
Loan loss experience grade or equivalent and with the Non-life
An allowance for losses for banking largest exposure to a single non-in- In non-life business, insurance risk re-
operations is maintained at a level vestment grade rated counterparty lates to claims that might be more fre-
considered adequate to absorb losses (BB+) of some CHF 700 million. quent or larger than forecast, and/or
arising from the existing portfolios of Concentration risks are strictly limited. might have to be paid earlier than ex-
loans and loan equivalents. The For instance, exposures to the telecom pected (expected pay-outs are priced
allowance for such losses is made in sector amounted to 3.5% of total into the premiums paid). Better-diversi-
accordance with Swiss banking laws. credit exposures at end-2000, fied insurance portfolios tend to imply
Each business unit creates provisions including the integration of Donaldson, smaller differences between expected
for bad and doubtful debts based on Lufkin & Jenrette. Furthermore, and actual claims. Winterthur therefore
Credit Suisse Group guidelines. The provisioning levels are kept stable as holds a well-diversified insurance port-
allowances are reviewed on a quarterly presented in the asset quality table folio, in terms of both geographical
basis by senior management. above. diversification and industry structure.
42
