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MC Explains| The unfolding crisis at Credit Suisse and its impact on financial markets

The impact on India’s financial markets may be muted because they are not as interlinked with global financial markets as those of some other countries. But there will be a negative shock, possibly leading to a further slowdown in economic growth.

March 16, 2023 / 05:59 PM IST
As shares of European bank Credit Suisse (CS) Group AG tanked and benchmark bond prices fell, it reignited fears of a full-blown global banking crisis.

As shares of European bank Credit Suisse (CS) Group AG tanked and benchmark bond prices fell, it reignited fears of a full-blown global banking crisis.

Shares of Credit Suisse plunged by 30 percent on March 15 after its biggest investor, Saudi National Bank, ruled out any more cash injections into the troubled Swiss Bank. Credit Suisse tried to assure markets, but to no avail. The Swiss central bank had to issue a statement promising emergency funding to Credit Suisse and also to the wider financial markets. Here is what led up to the crisis.

What has been the financial position of Credit Suisse?

The bank has been in news for all the wrong reasons since 2022. After making a loss in 2021, the group posted losses in all four quarters of 2022. Following the quarterly losses, there were reports that the bank is in trouble. On March 15, 2023, the bank released its Annual Report for 2022. The bank disclosed that it had incurred a pre-tax loss of 3.2 billion Swiss francs (CHF), and a post-tax loss of CHF 7.2 billion. Total assets had declined by 30 percent and return on equity was a negative 16.1 percent. Credit Suisse earns revenues from four businesses: wealth management, commercial banking, asset management and investment banking. The wealth management division and investment banking generated losses while the commercial bank and asset management produced profits.

The annual report also added that the bank will incur a significant loss in 2023, which had already led to concerns on the sustainability of the group.

The bank explained that its “financial results for 2022 were significantly affected by the challenging macro and geopolitical environment with market uncertainty and client risk aversion.” While adverse global factors were definitely a major reason, the bank was making losses on account of poor investments. Another important factor is that world financial markets have been living on low interest rates and high liquidity for nearly 15 years. The highly easy monetary policies were like a drug to which financial markets and firms had got addicted. When this drug was taken away suddenly, it created multiple problems.

MC Explains

What led to the crisis?

As the bank’s poor financials had become widely known, it was seen as a ticking time-bomb. The question was whether it could delay and somehow defuse the bomb and prevent an explosion.

The trigger was the failure of Silicon Valley Bank (SVB) in the US. SVB was the 16th largest US bank and was named one of the best US banks a few days earlier! The SVB collapse was followed by the failure of two more banks: Signature Bank and Silvergate Corporation.

As it happens in banking, a bank failure poses a question mark over other banks too. Usually, the crisis is limited to local banks of that country but could spread to other global banks too. This is typically true when a bank fails in a globally connected financial system such as the US. Depositors and investors start worrying that they may be vulnerable to a bank failure, too, if a large bank can collapse in the world’s biggest economy. This could lead to a bank run/collapse in other countries too.

A similar story played out in Credit Suisse, a large global bank that was already in trouble, as revealed by its quarterly reports. The bank was trying to raise capital from investors in the Middle East and trying to remain afloat. The bank failures in US just before the release of the Annual Report acted as the major trigger. As the bank released its Annual Report, markets simply acted on what was already prior knowledge. Investors from the Middle East refused to provide any more capital adding to the woes of the bank.

What is the response of the Swiss authorities?

The Swiss National Bank (SNB) and Swiss Financial Market Supervisory Authority (FINMA) issued a joint statement. The statement said that the “problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets.” Further, it added that “the strict capital and liquidity requirements applicable to Swiss financial institutions ensure their stability”.

On Credit Suisse, it said that the group “meets the capital and liquidity requirements imposed on systemically important banks. If necessary, the SNB will provide CS with liquidity.” Credit Suisse announced that it will avail of SNB’s help to the tune of CHF 50 billion and raise another CHF 3 billion from other sources.

Is this another Lehman moment?

The markets are abuzz that this is another Lehman moment of 2008. In September 2008, Lehman Brothers, a leading US based investment bank, failed leading to the Global Financial Crisis. The crisis also engulfed the Swiss banking system with another large Swiss bank UBS having to be bailed out just as Credit Suisse is being bailed out today. Like Lehman Brothers Credit Suisse is both a Too Big To Fail Bank and Too Big To Save Bank as well.

While one can never be sure about any financial market crisis, there is some hope that regulatory measures taken since the 2008 crisis have added to the stability of the global banking system. The stability was intertwined with the easy monetary policy and the easy policy regime is over. These are testing times for global banking & regulators and we have to see whether the measures taken will help the financial system or not. The recent spate of crises does suggest that there are still significant gaps in financial markets and regulations. Having said this, one can't help but point out that the current Chairperson of Swiss Group is someone with the surname Lehman (Mr Axel Lehmann)!

What will be the impact on India?

Credit Suisse operations in India are limited. However unlike SVB, Credit Suisse is a much larger global financial entity. If it remains in trouble for a longer time or fails, the impact will be felt across world financial markets and the global economy. The impact will be seen on Indian financial markets and economy too. The impact may be muted as India’s financial markets are not as interlinked with global financial markets as those of some other countries. But there will be a negative shock leading to a further slowdown in economic growth.

Amol Agrawal is faculty at Ahmedabad University.