Credit Suisse Crisis: All you need to know

By: Yash Gupte

At 31,874.57, the 30-stock Dow finished 280.83 points, or 0.9 percent down. The S&P 500 dropped 0.7 percent to 3,891.93. Little gains were made by the Nasdaq Composite, which increased 0.05 percent to 11,434.05.

The Silicon Valley Bank crisis and the downfall of the Signature Bank in the US has sent a wave of Déjà vu across the world. As the collapse of Silicon Valley Bank and the Signature Bank became known to people across the globe, they began discussing about the 2008 financial crisis. But the banking crisis in US has now spilled over to Europe with Credit Suisse’s stocks recording a fall of more than 31 percent. The back to back collapse of three major banks in the United States of America and now the Credit Cruise crisis has sent a waves of shock and panic across the financial sector and there is barely any country not affected by the collapse of these institutions.

On Wednesday, March 15, 2023, the Credit Cruise's stock price dropped by 31 percent at one point after the Swiss financial institution's top lender Saudi National Bank ruled out any further assistance as the cost of default insurance on the 167 year old lender's short term debt reached alarming levels. The collapse of four major financial institutions has impacted the global equities and the Indian stock market as the two benchmark indices Sensex and Nifty closed lower for the fifth consecutive day.

At 31,874.57, the 30-stock Dow finished 280.83 points, or 0.9 percent down. The S&P 500 dropped 0.7 percent to 3,891.93. Little gains were made by the Nasdaq Composite, which increased 0.05 percent to 11,434.05. The day's highs for the major averages were substantially above their session lows. The S&P 500 momentarily gave up all of its 2023 gains, while the Dow briefly dropped 725 points. Following a statement from a Swiss regulator that the nation's central bank will provide Credit Suisse liquidity if necessary, the indices gained some ground in afternoon trading. Investors expressed alarm after the largest shareholder in Credit Suisse, the Saudi National Bank, announced it was unable to offer more money.

After warning on Tuesday that its auditor had discovered "material weaknesses" in its financial reporting controls, which in turn caused the publication of its annual report to be delayed, Credit Suisse, the second-largest lender in Switzerland and one of the top 20 largest banks in Europe, is now battling to persuade the markets that it is financially sound. Because it has already been dealing with a greater rate of withdrawals since last year as a result of a number of failures, Credit Suisse was already exposed to concerns regarding a potential bank run, in which customers rush to withdraw their savings to leave the bank short on cash.

A multinational investment bank and provider of financial services, Credit Suisse Group AG is headquartered in Switzerland. One of the nine worldwide "bulge bracket" banks, with its headquarters in Zürich, it maintains offices in all major financial locations and offers services in investment banking, private banking, asset management, and shared services. In order to help pay for the expansion of Switzerland's rail system, Credit Suisse was established in 1856. It made loans that were used to build the European rail network as well as the electrical grid in Switzerland. In response to the rise of the middle class and competition from fellow Swiss banks UBS and Julius Bär, it started to transition to retail banking in the 1900s. The company was one of the least affected banks during the global financial crisis, but afterwards began shrinking its investment business, executing layoffs and cutting costs.

Credit Suisse began talks with regulators on March 15 as a result of the decline in the value of its equities, whose shares have shown extreme volatility since reaching record lows this week, and of its bonds, whose default insurance costs have reached alarming levels. Following those discussions, Credit Suisse used a liquidity facility established by the Swiss National Bank to borrow CHF 50 billion, or approximately $54 billion, to strengthen its finances and attempt to restore some market trust.

There are conjectures as to what might occur next. It has been suggested that the Swiss government might invest in Credit Suisse to provide some additional funding. Shareholders would be happy about it, especially after Saudi National Bank bailed, but it would be the clearest indication yet that bailouts are returning. According to Bloomberg, the bank's Swiss division may be split up, and there is a remote possibility that regulators may support a merger with UBS, Switzerland's largest bank.

The assets owned by Credit Suisse, the 12th largest foreign bank in India, total Rs 20,700 crore. Even if the bank fails, an eventuality not many economists anticipate, the impact on the Indian economy will probably be minimal. This is due to the bank's ownership of the Indian banking system, which is only 0.1 percent.