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What went wrong with Credit Suisse?

After failures of some banks in the United States, troubles amplified for Credit Suisse.

Credit Suisse Group AG

Credit Suisse Group AG was a global investment bank headquartered in Zürich, Switzerland. It was bought by UBS Group AG on March 19, 2023. The reasons for its failures are –

Big scams and losses uncovered in Credit Suisse during recent years.
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Falling share prices of Credit Suisse, withdrawal of funds by the customers and rising Credit Default Swaps for Credit Suisse.

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Silicon Valley Bank (SVB) collapsed on March 10, 2023 after a run on the bank.

 

 On March 14, 2023, Credit Suisse said in its 2022 annual report that the bank has identified "material weaknesses" in internal controls over financial reporting.

 

 The largest shareholder of Credit Suisse, Saudi National Bank, said in an interview that it wasn’t considering adding to its investment due to regulatory rules. Saudi National Bank owns 9.9% of Credit Suisse. Capital requirements often prevent banks from holding more than 10% of other banks.

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Sharp fall in share prices of Credit Suisse, large withdrawal of funds by the customers and rise in Credit Default Swaps for Credit Suisse.

 

 Swiss National Bank offered to lend 50 billion Swiss francs ($54 billion) to Credit Suisse.

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To protect financial stability, Swiss National Bank arranged for takeover of Credit Suisse. UBS Group agreed to buy Credit Suisse for around 3 billion Swiss francs ($3.25 billion).

What is Credit Default Swap (CDS)?

‘Credit Default Swap (CDS)’ means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event (for eg. insolvency) with respect to a reference entity (against whose credit risk the contract is entered into). In return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier.

Will the failure of Credit Suisse affect India?

Credit Suisse is the 12th largest foreign bank in India. It owns assets worth ₹20,700 crore which is just 0.1% of the assets in the Indian banking system. It has a presence in the derivative markets and funds 60% of its assets from borrowings, of which 96% has a tenure of up to 2 months and around 70% of assets are in G-Secs (short-term). However, Credit Suisse failure is expected to have minimal impact on Indian banking sector.


References

IIFL Securities. (2022, October 08). Where Did Credit Suisse Go So Badly Wrong? Retrieved from https://www.indiainfoline.com/article/general-blog/where-did-credit-suisse-go-so-badly-wrong-122100800159_1.html

Mitchell, C. M. (2023, March 20). Why Is Credit Suisse in Trouble? The Banking Turmoil Explained. Retrieved from The Wall Street Journal: https://www.wsj.com/articles/why-is-credit-suisse-in-trouble-the-banking-turmoil-explained-6f8ddb5b

Sultana, N. (2023, March 20). India may not be immune to an SVB, Credit Suisse-induced recession. Retrieved from India Forbes: https://www.forbesindia.com/article/take-one-big-story-of-the-day/india-may-not-be-immune-to-an-svb-credit-suisseinduced-recession/83801/1


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