CREDIT SUISSE - ECONOMY
News: Banking
giant UBS acquiring Credit Suisse for $3.2 billion
What's in the news?
● In
a distress sale, Credit Suisse,
Switzerland’s second largest bank and one of the most influential banks in
global history, was sold to UBS, which is Switzerland’s largest bank and a
long-time rival.
● The
deal was hurriedly brokered by Swiss government and regulators in a bid to not
just contain the crisis of confidence in Credit Suisse, which reportedly faced
withdrawals of close to $10 billion last week, but also to stop the contagion
to other banks.
Key takeaways:
● Swiss
President Mr. Berset called the announcement “one of great breadth for the
stability of international finance. An uncontrolled collapse of Credit Suisse
would lead to incalculable consequences for the country and the international
financial system.”
What's next for Credit Suisse?
● The
combination of the two biggest and best-known Swiss banks, each with storied
histories dating back to the mid-19th century, amounts to a thunderclap for
Switzerland’s reputation as a global
financial center - leaving it on the cusp of having a single national
champion in banking.
● While
UBS is buying Credit Suisse, UBS officials said they plan to sell off parts of
Credit Suisse, or reduce the size of the bank over the coming months and years.
● The
Swiss central bank has agreed to provide a loan of 100 billion Swiss francs
($108 billion) backed by a federal default guarantee to support the deal, which
is expected to be completed by the end of the year.
Credit Suisse:
● Credit
Suisse is designated by the Financial
Stability Board, an international body that monitors the global financial
system, as one of the world’s globally
systemic important banks.
● It
is one of the nine global "bulge
bracket" banks providing services in investment banking, private
banking, asset management, and shared services.
● This
means regulators believe its uncontrolled failure would lead to ripples
throughout the financial system not unlike the collapse of Lehman Brothers 15
years ago.
Influence of Credit Suisse:
● While
smaller than its Swiss rival UBS, Credit Suisse still wields considerable
influence, with $1.4 trillion assets
under management.
● The
firm has significant trading desks around the world, caters to the rich and
wealthy through its wealth management business, and is a major advisor for
global companies in mergers and acquisitions.
● Notably,
Credit Suisse did not need government assistance in 2008 during the financial
crisis, while UBS did.
Issues in Credit Suisse:
● Bank’s
cash flow statements suffered from “material
weakness” in the bank’s internal controls on financial reporting as of the
end of last year.
● The
Swiss bank’s largest investor, the Saudi
National Bank, said it would not be in a position to provide more cash due
to regulatory red lines.
● Greensill issue
- Greensill was the largest non-bank provider of supply chain finance which
borrowed large sums of money from outside investors including Credit Suisse.
○ When
Greensill went bankrupt, both the bank and its clients suffered in tandem.
● Increasing cost of
capital - The bank was forced to pay a higher
cost on its borrowing.
● Archegos Capital fiasco
- Credit Suisse lost 5.5 billion dollars from the collapse of the Archegos
Capital Management investment fund.
Is there any link between Credit Suisse's failure and
Silicon Valley Bank?
● Many
of Credit Suisse’s problems are unique
and do not overlap with the weaknesses that brought down Silicon Valley Bank
and Signature Bank, whose failures led to a significant rescue effort by
the Federal Deposit Insurance Corporation and the Federal Reserve.
Impact on India:
● Established
in India in 1997, Credit Suisse has
offices in Mumbai, Pune and Gurgaon, with vendor offices in Bangalore,
Hyderabad and Kolkata.
● India,
according to the bank, represents “the second-largest footprint for Credit
Suisse outside of Switzerland” and that it is “an important recruitment center”
for the bank globally.
● 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.
● However,
there could be a cascading impact of
global regulatory action, such as a pause in the ratings hikes, that would
have a bearing on the Reserve Bank of India’s stance on market rates and
outlook for the markets.
● But
a deepening banking crisis in the US or the EU could mean fresh troubles for
lenders in other geographies, including India. A banking crisis could, in turn, have a deleterious effect on the
economic recovery that is currently underway.