Credit Suisse, however, has had financial issues for the previous two to three years and has faced questions about filing its audited financial accounts. The possibility of the bank merging with another bank was also discussed around this time last year, but those discussions did not materialize.
Credit Suisse issue
The most recent bank in the headlines is Credit Suisse Group AG, which has its headquarters in Zurich and is Switzerland’s second-largest financial services and investment bank. With assets around Rs 20,700 crore, it ranks as India’s 12th largest foreign bank.
The Swiss bank disclosed “serious deficiencies” in its financial reporting earlier this week, leaving investors unsure about the lender’s chances of receiving financial assistance.
As news broke that the bank’s biggest investor, Saudi National Bank, or SNB, had decided against providing the bank with further funding due to regulatory concerns, the problems escalated into a full-blown crisis.
Moreover, the cost of default insurance for Credit Suisse Group bonds increased to its highest level ever. According to pricing source CMAQ, the 5-year credit default swaps for the Zurich-based lender increased by as much as 36 basis points to 453 basis points on Monday.
Credit Suisse stock fell
Such a rapid increase implies that a business is under credit stress, which led to a significant sell-off in the shares. The stock fell by as much as 30%, which stopped trade.
Is the banking crisis at Credit Suisse more serious than the SVB failure?
SVB’s crisis was unexpected and quickly escalated to a systemic concern for the financial system. The financial issues facing Credit Suisse were not entirely secret, though.
Yet, the collapse of the SVB and two other banks in the US raised concerns about the viability of banks with shaky operations.
But, it’s crucial to keep in mind that Credit Suisse is far bigger than SVB and more linked to the world financial system.
Hence, a Credit Suisse bankruptcy might have a significant effect outside of Europe.
Credit Suisse Risk to India
Credit Suisse is not viewed as a direct threat to India, even in the worst-case scenario of an SVB-like collapse, given it only holds 0.1% of the assets in the Indian banking system.
According to a Jefferies report, the Swiss banking behemoth is active in the derivatives market and finances 60% of its assets via borrowings, 96% of which have terms of up to two months.
Analysts predict gentler modifications in the evaluation of counterparty risks, notably in the derivative market, given the significance of Credit Suisse to India’s banking industry.
What Are Insiders In The Market Saying?
Brokerage Jefferies anticipates that the RBI will closely monitor the counterparty exposures and liquidity problems and take appropriate action.
With the strict liquidity standards for the banking sector, Nilesh Shah of Kotak Mahindra AMC thinks it is unlikely that India would see a crisis similar to SVB or Credit Suisse.
The banking industry in India has adopted Basel-III standards, which require banks to maintain a liquidity coverage ratio that, according to SVB instances, was not being maintained.
There was a concentration of deposits from a certain area or from a specific type of company in the case of SVB and likely Credit Suisse.
But generally speaking, Shah added, most Indian banks have a decent level of diversity.
Also, there is a limit on how much banks can invest in a portfolio that is held till maturity, or HTM.
According to Shah, “We have enough train guards to make sure that our financial system does not go derailed in a similar manner to what happened with the SVB sort of scenario.
Can the banking crisis spread to other industries?
The Credit Suisse or US financial crisis won’t directly affect the Indian banking system, but it is expected to have some effect on the country’s information technology sector.
The largest export destinations for Indian IT businesses are the US and Europe. Furthermore, one of the largest income streams for large-cap IT giants is the Banking and Financial Services industry or BFSI.
BFSI provided over 40% of Tata Consultancy Services’ total revenue in FY22. The percentage of income from this area that goes to Infosys is likewise similar.
Thus, a financial crisis might dim the commercial prospects for providers of IT services.