What Is The Credit Suisse Crisis?

 What Is The Credit Suisse Crisis?

Who is Credit Suisse

•       Credit Suisse has a domestic Swiss bank plus Wealth management investment banking & asset management  operations the Swiss National Bank has designated it one of the Switzerland global Systemically important banks  whose failure would cause “ Significant harm to the Swiss economy & financial system

  Who controls the Swiss banking system?

•       Credit Suisse is one of the oldest and most influential banks around the globe. While the bank is widely acclaimed and known for its influence and robustness, it has touched an all-time low.

•        Ever since the ongoing year started, Credit Suisse’s share price has seen a 60 percent decline. Meanwhile, the credit default swaps (CDS) spreads on Credit Suisse debt have jumped to a 14-year high.

•       The CDS spread this time is the highest since the 2008 global financial crisis.

•       These two major trends have resulted in widespread speculations foreseeing the collapse of Credit Suisse.

•       Social media compares the condition of Credit Suisse with that of the great American investment bank, Lehman Brothers, which collapsed dramatically in 2008.

Events Triggering The Concerns Surrounding Credit Suisse

A letter by Chief Executive Ulrich Koerner to the employees of Credit Suisse on September 30 marks the latest event that stirs up concerns.

“I know it’s not easy to remain focused amid the many stories you read in the media — in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,” he expressed in the letter.” he expressed in the letter.

•       However, Credit Suisse’s market value has been getting lost ever since the financial crisis of 2008.

•       A secular decline has been seen in the share price. What accounted for this sharp decline? The risky bets undertaken by Credit Suisse and its drastic loss of a great amount of investor money is the chief reason behind this condition. Such activities have adversely impacted its profitability, shook investor confidence, and resulted in the raising of fresh capital to turn even costlier.

Have a look at a risky step by Credit Suisse.

•       The bank instructed a lot of its customers to invest around $10 billion in Greensill Capital, which is a lender of sorts itself.

•       The Greensill Capital intermediated between clients and suppliers. Everything was going well, and Greensill Capital was gaining a great deal of good attention and money, all due to Credit Suisse and other such banks that trusted the business.  Gradually, speculations regarding Greensill’s potential to remain solvent grew. Unfortunately, by March 2021, Greensill Capital filed for bankruptcy.

•       Adding to the woes of Credit Suisse, Archegos Capital Management too collapsed during the same time. Due to this incident, Credit Suisse had to bear a loss worth $5.5 billion.

 

An incident worth attention to was when CEO Tidjane Thiam had to quit. The reason behind this quitting was that it became evident that he had been spying on Iqbal Khan, Credit Suisse’s wealth management executive. A myriad of such malpractices and exits became common.

 

The Impact On Credit Suisse

The decline in the share price of Credit Suisse showcases nothing but a glimpse of how investors have consequently gotten rid of the prestigious bank.

Moreover, the bond of Credit Suisse has become cheaper. The reason behind the decline in the price of the bonds is the fact that not many people are willing to lend money to the bank.

This has further led to yields mounting up quite drastically. What does this increase in the yields imply for the bank? Well, higher yields broadly mean that the bank must pay higher returns for each and every euro or dollar it borrows from the market

This is not an issue to be overlooked,

•       rather it is a huge problem, especially in times when growth prospects are failing alongside the increased interest rates by the central banks to contain inflation.

•       What will a bank with worsening profitability do in this case? Well, obviously, the bank will raise money at increasingly rising interest rates. However, this becomes a struggle in a market that fails to provide enough returns.

•       Adding to the problems is the issue of the rising spread of Credit Default Swaps.

Now The Credit Default Swaps: EXPLAINED!

•       Basically, a Credit Default Swap is nothing but an insurance instrument

•       Supposedly, an investor has lent money to a company (say XYZ). The investor, however, is not very confident in XYZ’s ability to repay the loan. In such a situation, the investor can purchase a Credit Default Swap on XYZ’s bond. A Credit Default Swap promises that in case XYZ is unable to repay the loan, the insurer would pay the amount.

•       On the other hand, the insurance firm that sells the Credit Default Swap obtains a certain interest. This interest is called the Credit Default Swap spread. In cases where these speeds increase, they imply the increasing probability of the failure of a particular bond.

•       In the case of Credit Suisse bonds, the CDS spreads have increased to a 14-year high.

Finally, Credit Suisse’s Response

•       “We are in the process of reshaping Credit Suisse for a long-term, sustainable future — with significant potential for value creation. Given the deep franchise we have, with a long-standing focus on serving some of the world’s most successful entrepreneurs, I am confident we have what it takes to succeed,”  expressed Chief Executive Ulrich Koerner in a memo.

•       All eyes have turned to Credit Suisse which will release a new plan aiming to transform the bank’s functioning and gain the much-required investor confidence on October 27.

27  th October will be very important 

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