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Credit Suisse Crisis

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March 22, 2023

Why in news?

Recently UBS bank agreed to buy Credit Suisse bank that involved in fraud and forgery and collapsed eventually.

What is Credit Suisse?

  • Credit Suisse is a famous investment bank headquartered in Switzerland.
  • It’s been around since 1856.
  • Swiss central bank has designated it one of the country’s global systemically important banks (G-Sib).
  •  Credit Suisse is the 12th largest foreign bank in India and it owns assets worth Rs 20,000 crore.

Global systemically important banks (G-Sib) is a bank whose systemic risk profile is deemed to be of such importance that the bank’s failure would trigger a wider financial crisis and threaten the global economy.

What led to the Credit Suisse crisis?

Causes

  • Fallen share price -Since the beginning of 2022, Credit Suisse’s share price has fallen close to 60%
  • Credit default swaps (CDS) -The spreads on credit default swaps (CDS) on Credit Suisse debt have spiked to a 14-year high — the highest since the global financial crisis of 2008.
  • Risky bets -Credit Suisse has made several risky bets and ended up losing a lot of investor money.
  • Fading investor’s confidence –the falling share price eroded investor confidence, and has made raising fresh capital costlier.

Credit Default Swaps (CDS) is an insurance instrument. If an investor who has lent money to a firm (say Credit Suisse) is unsure about the firm’s ability to repay, the investor can buy a CDS on Credit Suisse’s bond.

Issues 

  • The biggest loser in the crisis are AT1 bond holders.

What is Additional Tier 1 (AT1) bonds?

  • AT1 bonds are also known as “contingent convertibles,” or “CoCos”.
  • They are a type of unsecured, perpetual bonds that banks issue to improve their core capital base.
  • It was introduced in the aftermath of the 2008 global financial crisis.
  • AT1 are a risky bet — if a lender gets into trouble, AT1 bonds can be quickly converted into equity or written down completely.
  • They have higher risk and AT1s offer a higher yield than most other bonds.
  • They are long-term and do not carry any maturity date.
  • AT1 bonds are mandatory under Basel III norms.

What are the impacts on India?

  • The crisis may have some impact on the Indian information Technology Industry, markets and startups.
  • The startups receiving funds from Silicon valley bank may face funding issues.
  • India has implemented Basel-III norms for the banking system.
  • Under this system, banks have to maintain liquidity coverage ratio, which was actually missing from the SVB case and to some extends even in the case of Credit Suisse
  • AT1 may contribute to a higher cost of capital for banks, including Indian lenders

Credit Suisse is not being seen as a direct threat in India as it owns just 0.1% of assets in the Indian banking system.

What are the differences between European and US crisis?

European crisis

US crisis

  • European crisis is credit Suisse crisis
  • Triggering factor -Credit Suisse was partly a victim of bond market losses, but multiple other factors were at play in its downfall
  • A poor governance record and chequered investment decision-making, which saw the bank lurching from scandal to scandal over much of the last decade.
  • US crisis include Silicon Valley Bank (SVB) and Signature Bank crisis
  • Triggering factor -Over 90% of deposits at Silicon Valley Bank (SVB) and Signature Bank were uninsured, and thereby prone to bank runs.
  • These banks were also invested heavily in long-term government bonds — and when interest rates rose, the value of their bond portfolios declined

What are the measures taken to resolve the crisis?

  • The Swiss government and regulators in a bid to contain the global financial market panic brokered the deal between UBS and credit Suisse.

Related links - Silicon Valley Bank and Signature Bank Crisis, Yes Bank Crisis, Credit Suisse Crisis

 

References

  1. The Indian Express │Credit Suisse
  2. The Indian Express │AT1 Bonds
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