After SVB Now Credit Swiss On The Verge Of Collapse? Will It Impact India?

Credit Suisse’s five-year Credit Default Swap (CDS), is the cost of insuring the bank’s bonds. it rose to 574 basis points, a new record high.

It’s a bloodbath in the Banking sector. After US Silicon Valley bank and Signature bank, the second biggest bank in Switzerland, Credit Suisse is on the verge of a collapse. The Bank’s shares crashed by more than 20% dragging the European Banking index by more than 6%. Despite the efforts of regulators to allay the fears of investors/depositors and avoid a 2008-like situation where the collapse of Lehman Brothers led to the global financial meltdown, the contagion fears seem to be spreading fast.

So what’s happening with Credit Suisse? How did one of the most important banks globally come to this point? and What’s next? We will try and understand this in this article.

You might’ve heard the phrase called too big to fail. Some entities are believed to be so big that they can’t fail or rather they can’t be allowed to fail. Credit Suisse is one of those that are too big to fail. In fact, the bank is a “global systemically important bank”. Which means its failure could trigger a global financial crisis.

The fears of the bank’s failure, however, mounted this week, as its shares faced a rout. So much so that the bank’s future and its existence have come under speculation.

The recent market selloff was triggered after the news got out that Credit Suisse’s Largest shareholder Saudi National Bank refused to invest more funds in the bank triggering panic. But this wasn’t a crisis that came upon the bank overnight. The crisis was kind of in the making, so to say. But first, little bit of History:

Credit Suisse Group AG is a global investment bank and financial services firm founded and based in Switzerland. When it was founded in 1856, it wasn’t a bank serving individual customers. Major purpose of the bank was to fund the development of Switzerland’s rail system. It issued loans that helped create Switzerland’s electrical grid and the European rail system. In the 1900s, it began shifting to retail banking in response to the elevation of the middle class and competition from fellow Swiss banks. Credit Suisse partnered with First Boston in 1978 before buying a controlling share of the bank in 1988.

The bank was among the least affected during the Global financial crisis. At the end of 2021, Credit Suisse reported over 1.6 trillion Swiss francs in assets and over 50,000 employees in the institution.

However, for the past three years, problems have been mounting for credit suisse resulting in cutting jobs and mass layoffs.

So what really went wrong for Credit Suisse?

Since 2019, the bank has been mired in several controversies that ranged from money laundering involving drug dealers to spying scandals involving top executives and client data leaks. Switzerland’s reputation as the banker for the worlds rich is impeccable because of discretion and reliability. These controversies also led to raising questions over this reputation.

Let me walk you through these scandals briefly In 2019, the Chief Operating Officer, Pierre-Olivier Bouée was discovered to have hired private investigators to spy on high-level employees and was fired shortly after. The private investigator also mysteriously “took his own life,” the bank reported while announcing Bouée’s removal.

In March 2021, a month before the Archegos scandal became public, Credit Suisse also announced that it was closing and liquidating several investor funds, worth $10 billion, provided to another financial services company, Greensill capital. Greensill declared insolvency in March 2021. Investors reportedly suffered a loss to the tune of ₹3 Billion as a result.

In February 2022, a massive leak of over 30,000 of Credit Suisse’s clients revealed over $100 billion in wealth held by people who had profited from “torture, drug trafficking, money laundering, corruption, and other serious crimes,” according to The Guardian.

The bank also found itself entangled in a corruption scandal in Mozambique. Since 2019, the bank also underwent a leadership change several times. All of this marred the credibility of the Bank. In 2022, the bank faced a loss that almost wiped out a decade’s worth of profit.

So what Happened Now That Triggered the Crisis?

Well, the present crisis is nothing but a snowfall effect and adds to it some recent external factors. As the problems mounted on Credit Suisse, clients started pulling away. The New CEO Ulrich Koerner launched a massive outreach to bring back its customers. He also wrote a letter to employees around October 2022 assuring them about the financially sound health of the bank.

His efforts were receiving good response till January when the bank declared net positive deposits. However, last week, the US Securities and Exchange questioned the bank’s annual report, leading to the delay in its publication. By the weekend, Silicon Valley bank collapsed, followed by Signature bank. The panic spread and the depositors started to dump anything that felt banking risk.

After the Saudi National Bank chairman clarified that they won’t be investing more money in the bank, the shares began to drop.

What is CDS and Why did It Rise?

Credit Suisse’s five-year Credit Default Swap (CDS), is the cost of insuring the bank’s bonds. it rose to 574 basis points, a new record high.

The last time it was this high was around the 2008 financial crisis. Under the CDS, if a company defaults on repayment, the insurance company pays the amount. An increase in CDS means the likelihood of a debt default or rising problem in a company, and vice-versa.

What Next For Credit Suisse?

According to Bloomberg, Credit Suisse has discussed ways to stabilize the bank with swiss authorities. It also reportedly asked the Swiss central bank to issue a statement of support to allay the fears of investors and clients. Credit Suisse announced it has arranged to borrow as much as 50 billion francs from the Swiss National Bank and is making a tender offer to buy back up to three billion francs of the dollar- and euro-denominated debt.

Will It Impact India?

The short answer: Yes. Credit Suisse owns more than 200 billion rupees of assets in India, making it the 12th largest offshore lender, according to equity analyst Jefferies. Loans account for 73 per cent of its total liabilities in the South Asian nation, with the majority of them of a short tenure. Thus, with the sudden plunge in the bank share and its impact in the European market, concerns grew in India too.

However, India’s banking sector will likely have a softer impact from the troubles at Credit Suisse, given the Swiss lender’s relatively small presence in the country. Although, Jefferies mentioned that the impact of Credit Suisse will be comparatively more relevant to India than SVB crisis.

So as the contagion fear tightens its grip on global markets, the question is not only what’s next for Credit Suisse but also who’s next after Credit Suisse?

Arti Ghargi

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