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Credit Suisse & Others Tighten Lending Terms in Archegos Collapse

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Following the collapse of Archegos Capital Management in March, which triggered one of the biggest trading losses in the history of Wall Street, a few affected banks are attempting to tighten credit lines of their hedge fund clients.

According to hedge fund managers, banks like Credit Suisse Group AG (CS - Free Report) , Morgan Stanley (MS - Free Report) , Nomura Holdings (NMR - Free Report) and UBS Group AG (UBS - Free Report) are conducting a review of their respective businesses that lend money to hedge funds and family offices for any potential weakness in an effort to prevent any event similar to the Archegos collapse.

Notably, Archegos, the New York family office run by fund manager Bill Hwang, took huge bets on a few stocks, using money borrowed from banks. However, after some of its biggest positions reversed, it was not able to meet the margin calls, resulting in a collapse.

Banks like Credit Suisse, Nomura, Morgan Stanley, UBS Group, Mitsubishi UFJ Financial Group (MUFG - Free Report) and Mizuho Bank were the prime brokers that offered almost $50 billion worth of leverage to Archegos but collectively lost more than $10 billion due to the fallout. After Archegos failed to meet the margin calls, the banks were forced to liquidate its positions in the United States-listed companies like ViacomCBS.

Morgan Stanley lost almost $1 billion, whereas Nomura lost a little above $2 billion. Losing $5.5 billion, Credit Suisse became the bank that took the biggest hit among its peers. In fact, the loss wiped out almost all of Credit Suisse’s profits made in the first quarter of 2021. In the absence of the Archegos loss, Credit Suisse could have reported one of its best quarterly financial performances in almost a decade.

Thus, in order to safeguard themselves against a similar event in the future, the banks are tightening credit terms and increasing scrutiny of their hedge fund businesses.

While Credit Suisse has planned to lower its prime-brokerage operations, Morgan Stanley is conducting a review of its stress-testing methodology. Also, UBS Group and Nomura have been reviewing their prime-brokerage relationships.

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