Banks around the world are expected to lose up to $10 billion as a result of the Archegos Capital Management meltdown. Initially, the US bank had estimated losses of between $2 billion and $5 billion but it seems the extent of the meltdown is far bigger than earlier thought.
It is expected that Credit Suisse and Nomura Holdings will be the hardest hit companies. The companies had extended very high levels of leverage to Archegos compared to other banks, including Goldman Sachs and Morgan Stanley. Despite this, the US banks believe that even though some institutions will suffer more than others, the meltdown is a stain on the banking industry and eventually, it will affect it as a whole.
But despite this, there are still several lessons to be learned from this episode. Even though a $10 billion loss is still huge, investment banks were not nearly as exposed as they were in 2008 during the financial crisis.
The statement released by the US bank noted that it seems like there is no excessive leveraging in both the investment banking and private banking sectors. This reduces risk exposure and helps banks to better mitigate the kind of meltdown we saw with Archegos.
Despite this, the leverage among private banks has been increasing in recent years albeit it’s still not close to the peak levels seen a few years ago. Secondly, it is clear that the regulatory framework seems to have improved risk management among investment banks. The bank cites Basel III and the Dodd-Frank Act as two key regulatory frameworks that may have helped avert further losses from the Archegos saga.
Despite this, the bank believes that oversight on non-banking entities remains weak and could be exploited in the future if it's not corrected. For example, by being a "family office" founded in 2012, Archegos was not obligated under law to disclose investments. This is very different from hedge funds that have very strict reporting standards to keep up with.
Archegos’s equity swap filings were never disclosed to the public as is the case for hedge funds and investment banks. This lack of transparency creates a very huge oversight loophole, something that makes enforcement of regulations for non-bank entities so difficult.
Nonetheless, the Archegos saga exposed a huge fragility in the financial system where investment firms regarded as family offices have so much leeway. It is believed that it is important for filing requirements to apply to these firms as it applies to everyone else. Private banks that were entangled in Archegos need to improve their background checks just to make sure they know who they are getting in bed with.
