In March 2023, the Swiss National Bank agreed to provide $54 billion in financial assistance to Credit Suisse, which has been facing a financial crisis for the last 2-3 years.

Credit Suisse Crisis

Credit Suisse is the second-largest global investment bank and financial services firm in Switzerland. The bank has been facing a financial crisis for the last 2-3 years and has been questioned for submitting its audited financial statements. Earlier, the bank had announced the existence of “material weaknesses” in its financial reporting, which left investors uncertain about the possibility of a financial rescue for the bank.

The situation worsened when reports of its largest investor, Saudi National Bank (SNB), ruled out providing further financial assistance due to regulatory issues. Additionally, an increase in the cost of insuring Credit Suisse Group’s bonds against default reached an all-time high indicating the credit stress for the bank. This triggered a massive sell-off in the stock, and the stock plunged as much as 30%.

Is the Credit Suisse crisis as bad as the Silicon Valley Bank (SVB) collapse?

While SVB’s crisis seemed to have emerged unexpectedly and became a systemic risk for the financial system, Credit Suisse’s financial difficulties were not entirely unforeseen. However, it is crucial to acknowledge that Credit Suisse is significantly larger and more interconnected with the global financial system than SVB. Hence, a potential meltdown of Credit Suisse could have far-reaching consequences.

Who bailed out Credit Suisse?

The Swiss National Bank agreed to provide $54 billion in financial assistance to Credit Suisse in March 2023.

Credit Suisse Crisis and Impact on India

Credit Suisse owns assets worth Rs. 20,700 crore in India and is the 12th largest foreign bank in the country. The impact of the Credit Suisse crisis on India can be analyzed from the following perspectives:

Impact on Indian Banking System

Credit Suisse owns just 0.1% of assets in the Indian banking system. This means that even in the event of a collapse similar to SVB, the bank is not viewed as a direct threat to India. Given the stringent liquidity norms existing in the Indian banking sector, an SVB or Credit Suisse-like episode is highly unlikely to happen in India.

In both SVB’s as well as Credit Suisse’s cases, there was a concentration of deposits from a particular region or from a particular kind of business. But most of the Indian banks have a good amount of diversification, which minimizes risk in that aspect too.

Impact on Indian Derivative Market

Credit Suisse’s significant presence in the derivatives market and its reliance on short-term borrowings, of which 96% have a tenure of up to two months, suggests that the assessment of counterparty risks may require some adjustment, particularly in the derivative market. But the Reserve Bank of India (RBI) is keeping a close watch on the liquidity issues and counterparty exposures and will intervene when necessary.

Impact on other sectors

Though both SVB and Credit Suisse crises are unlikely to create any impact on the Indian banking system, the Indian information technology industry is likely to have some impact. The biggest export markets for major Indian IT firms are the US and Europe. Banking and Financial Services (BFSI) are the major revenue-generating segments for these firms.

MCQs on Credit Suisse Crisis

  1. Which country is home to Credit Suisse?
    A. Germany
    B. Switzerland
    C. United States
    D. United Kingdom
    Correct Answer: B. Switzerland
    Explanation: Credit Suisse is the second largest global investment bank and financial services firm in Switzerland.
  2. What caused the sell-off of Credit Suisse stock by as much as 30%?
    A. Reports of its largest investor pulling out due to regulatory issues
    B. A decrease in the cost of insuring Credit Suisse Group’s bonds
    C. The release of positive financial results
    D. None of the above
    Correct Answer: A. Reports of its largest investor pulling out due to regulatory issues
    Explanation: The situation worsened when reports of its largest investor, Saudi National Bank (SNB), had ruled out providing further financial assistance due to regulatory issues.
  3. What is the impact of Credit Suisse’s crisis on India’s banking system?
    A. Credit Suisse owns 12% of assets in the Indian banking system.
    B. A collapse of Credit Suisse poses a direct threat to India’s banking system.
    C. Indian banks may need to adjust their assessment of counterparty risks in the derivative market.
    D. None of the above.
    Correct Answer: D. None of the above.
    Explanation: Credit Suisse owns just 0.1% of assets in the Indian banking system. This means that, even in the event of a collapse similar to SVB, the bank is not viewed as a direct threat to India.
  4. Which industry is likely to be impacted by the crises of both SVB and Credit Suisse?
    A. The automobile industry
    B. The construction industry
    C. The information technology industry
    D. The healthcare industry
    Correct Answer: C. The information technology industry
    Explanation: The biggest export markets for major Indian IT firms are the US and Europe. Banking and Financial Services (BFSI) are the major revenue-generating segments for these firms.

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