The Credit Suisse Catastrophe: What It Means for India’s Banking Industry?

The Credit Suisse Catastrophe: What It Means for India’s Banking Industry?

The 167-year-old Credit Suisse, also regarded as a “globally systemically significant bank,” which was founded as a bank for the ultra-wealthy elite, is today experiencing financial difficulties.

The uncertainty surrounding the bank Credit Suisse has had a detrimental influence on international markets, as have fears that rising interest rates around the world could produce catastrophic bank failures and need quick government intervention.

The failure of Silicon Valley Bank, which took place a week ago, was immediately followed by the tragedy that is currently taking place at Credit Suisse. Two huge banking crises that took place on two different continents just two days apart sparked questions about the risk of a contagion that would be similar to the global financial crisis that took place in 2008.

What Has Been Happening With Credit Suisse?

In its financial annual report, Credit Suisse disclosed that it had found “serious weaknesses” in its financial reporting. This caused unease on all international markets, sending shares tumbling as anxious investors rushed to reduce their exposure. The stock fell by as much as 30%, which stopped trade.

The likely failure of this bank would have an effect on the economy of the whole world. This bank is so important that its risk profile is thought to be so big that its failure could cause a bigger financial crisis.

The Swiss National Bank said in a statement that it would give Credit Suisse liquidity “if necessary,” according to the Washington Post report. The Swiss central bank then provided $54 billion in liquidity to Credit Suisse as a lifeline, which eventually reassured European investors as the market recovered.

How Does Saudi Arabia Handle This?

The Saudi National Bank, which last year purchased a nearly 10% share in the bank, has been Credit Suisse’s largest investor. The Saudi Bank announced it would not purchase any additional shares in the Swiss bank after the lender disclosed the flaw discovered during the annual report reporting process that demonstrates the firm’s lack of an effective risk assessment.

It was at this very moment that the bank’s problems developed into a severe crisis. According to the Bloomberg story, Ammar Al Khudairy, the chairman of the Saudi National Bank, replied, “The answer is absolutely not – for many reasons,” which worsened Credit Suisse’s issues.

The Saudi holding was at 9.8%, and he added that if it rose to 10%, several stricter regulations would take effect. Incidentally, according to a report in The Washington Post, Qatar’s sovereign wealth fund is another significant shareholder in Credit Suisse, owning a 6.8 per cent interest in the company.

How Would the Crisis at Credit Suisse Affect India?

The assets owned by Credit Suisse, the 12th largest foreign bank in India, total Rs 20,000 crore. In addition to its participation in the futures market and its assets of Rs 20,000 crore, the bank funded 60% of its assets through borrowings, including 96% in just two months, according to Jefferies research.

“Yet, with a 0.1% percentage of assets, it is still minuscule for the banking industry. We keep an eye out for liquidity problems and any adverse effects on the evaluation of the counterparty risk (particularly in derivatives), and the deposit market may shift towards larger, higher-calibre banks, it said.

According to sources, analysts predict gentler modifications in the evaluation of counterparty risks, notably in the derivative market, considering the importance of Credit Suisse to India’s banking industry. According to the Jefferies report, the RBI would closely monitor the liquidity problems.

According to the report, Nilesh Shah of Kotak Mahindra AMC believes that given India’s strict liquidity regulations for the banking industry, a situation similar to SVB’s or Credit Suisse’s is unlikely. According to Shah, “We have enough train guards to ensure that our financial system does not go derailed similar to what happened with the SVB kind of scenario.

According to the report, although the Credit Suisse or US financial crises won’t directly affect India or the Indian banking system, analysts think they may have some effect on the Indian IT sector.

Indian Banking Norms

India has established Basel-III banking system standards to protect itself from such a scenario. The liquidity coverage ratio, which was really absent in the SVB case and to some extent even in the case of Credit Suisse, must be maintained by banks under this arrangement. In plain English, there is a limit on how much banks can invest in a portfolio that is held to maturity or HTM.

Dark Credit Suisse Recordings

Investors have recently been alarmed by the bank’s historical involvement in several scandals. According to Forbes, the bank was found guilty in June 2022 of failing to stop a Bulgarian cocaine trafficking organisation from laundering money. The Swiss government fined the bank and made it pay $20 million as a penalty.

In a different case in 2022, a Bermuda court determined that the former bank was due $500 million in damages from the local life insurance firm of Credit Suisse by Georgian Prime Minister Bidzina Ivanishvili and his family.

According to a Forbes story, Tidjane Thiam, the CEO of Credit Suisse, was forced to resign in the year 2020 after it was revealed that the bank had used private investigators to investigate its previous head of wealth management after he left the company to join a competing bank. The information that led to this revelation came to light in the year 2020.

edited and proofread by nikita sharma