Welcome Finance Enthusiasts !!

About the Bank

March 2023 has been a doom for the banking sector. The collapse of Silicon Valley Bank and Credit Suisse in the same time frame has experts worried that these might be the repeat of 2008 crises. Credit Suisse was the second largest banking organization of Switzerland and a globally systemically important bank. Here ‘Globally Systematically Important Bank‘ refers that if the bank fails the global financial ecosystem will be affected.

The business model of the Bank was divided into five parts:
a) Wealth Management
b) Investment Bank
c) Swiss Bank
d) Asset Management

As a damage control, Credit Suisse was merged with UBS, it’s rival for 3 billion CHF (approx $3.3 billion) after its failure in March 2023.

How did the collapse happen

Well the collapse did not happen overnight. It was building up for quite a few years. The main reason for the collapse can be divided into three parts:

Reason 1: Unethical top management

Even if the business model of the bank is best it cannot survive if the top management does not operate on integrity. There have been numerous incidents in the last decade where Credit Suisse was in news for money laundering, dishonest practices and misrepresentation. The spying scandal, involvement in Archegos default and repetative management shifts are some of the biggest headlines.

Reason 2: Deteriorating financial conditions

Credit Suisse posted the worst quarterly loss in its history. The loss amount was more that what they had suffered in 2008 banking crises. There was significant drop in revenues and overall balance sheet of the bank. After its filling with the US Securities Exchange Commission (US SEC) the bank admitted having serious financial weaknesses.

Reason 3: Loss of Trust

The collapse of Silicon Valley Bank had happened during the same time. Credit Suisse was fearing they might also face ‘Bank Run’ and suffer liquidity crunch. Bank Run means to withdraw money due to fear of bank collapse. Credit Suisse approached its biggest shareholder Saudi National Bank (SNB) to infuse more capital. SNB held 10% stake in the bank and refused to invest more because of regulatory concerns.

In March 2023 Swiss Executives allowed the merger of the bank with UBS without shareholder’s approval. After the merger, UBS said that they planned to reduce the size of Credit Suisse in the coming years, potentially by selling off parts of the bank.

Impact on India

Whenever financial crises happens in US, India’s foreign exchange market is badly affected. India had exposure to Credit Suisse majorly in the derivatives and foreign exchange market. RBI is on alert after the collapse of three major bank collapses namely Silicon Valley Bank, Signature Bank and Crefit Suisse.

Impact on Switzerland

Switzerland’s reputation for a global banking hub took a big hit because of Credit Suisse’s collapse. When the Joe Biden Government rushed to announce that they would save the Silicon Valley Bank’s depositors money. The Swiss government allowed the merger of Credit Suisse and UBS. The collapse of the bank would pressurize the Govt for stricter compliance norms. The shares of Credit Suisse will be delisted.