Credit Suisse after Silicon Valley Bank: Decoding the current financial crisis

The present crisis seems to be resulting out of market nervousness as well as loss of investors and depositors' confidence, says Shishu Ranjan

Team Newsable

First Published Mar 16, 2023, 11:51 PM IST

The contagious effect of the closure of Silicon Valley Bank resulted in the closure of another American regional bank, the Signature bank, and now it has spread to European counterparts. Credit Suisse, the second largest bank in Switzerland, is the latest one feeling the heat.

The Saudi National Bank (SNB), the largest shareholder of Credit Suisse with 9.88 per cent shareholding, announced its inability to invest any further due to the regulatory requirement of not crossing the 10 per cent threshold, and this becomes the immediate trigger for a selling spree in the stock market that resulted in crashing of its share's prices by 30 per cent. There are three main reasons why Credit Suisse is in the middle of a financial storm that is threatening to destabilise the global banking system.

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One, the depositors' confidence was shaken by the closure of the SVB, and the SNB's announcement of its inability to invest further in Credit Suisse eroded the investors' and depositors' confidence.

Two, Credit Suisse has a long history of financial scandals and controversy. Even in the latest annual financial declaration, they accepted weak control in financial reporting and that is bound to create doubt in the mind of investors and depositors who are already under panic attack.

Third, Credit Suisse has been making losses mainly because of its Wealth Management and Investment Banking arms, and that is why its management has already announced the restructuring of both of these divisions. Given the adverse sentiments in the market, it is nobody's guess that the bank will find it hard to raise capital.

All three reasons contribute to the flight of investors and depositors, resulting in capital or asset erosion and creating a situation of liquidity risk.

However, there are three reasons why Credit Suisse may survive this financial storm. One, the European regulators are proactively managing the situation to prevent a similar situation in the US banking market. The Swiss Regulator, the Swiss National Bank and Finma have already agreed to loan 50 billion Swiss francs to avoid liquidity risks.

Two, the average liquidity coverage ratio in the first quarter of 2023 has averaged around 150 per cent, providing comfort around the liquid assets required to manage the depositor's flight risk. Three, Credit Suisse, being a Systematic Important Bank, is required to have an additional capital reserve to meet its financial obligations. The group has total assets of $531 billion against liabilities of $486 billion. The group has a capital ratio of 20 per cent against the required ratio of 8 per cent.

All three reasons are indicative of the sound financial position of Credit Suisse bank. Therefore, the present crisis seems to result from market nervousness and loss of investors' and depositors' confidence due to various reasons listed earlier in this article.

With its management announcing commitment towards restructuring the loss-making business and regulatory help coming to prevent the slightest liquidity risk, the depositors will gain some confidence and may refrain from moving their deposits to peer banking firms.

The current financial crisis is definitely indicative of a systematic risk arising out of the intermingling of conventional banking business with investment banking and wealth management arms. The latter is more linked to the market and high market risk. Unfair trading and stock manipulation create a systematic risk that has threatened the global banking system in unimaginable ways. Regulators across the globe will have to think beyond the implementation of Basel III regulatory capital requirement norms as the market conditions are creating liquidity risks of unprecedented nature.

Until the ongoing economic and financial storm passes, it is difficult to gauge the impact on the global system as the financial system is much more integrated than the last financial crisis in 2008. That is why regulators across the globe, including the Reserve Bank of India, became active within 24 hours to mitigate the fallout of SVB closure.

The author is Vice President-Independent Validation Unit (Model Risk) at Barclays. Views expressed here are personnel.

Last Updated Mar 16, 2023, 11:51 PM IST