How the banking crisis in unfolding in the West?

“The fear of crisis causes more damage than the crisis itself”

This stands true now more than ever, especially considering the global banking ecosystem with the fallout of major US Banks (SVB & Signature Bank) and the deepened European Banking Crisis.

Fundamentally, banking as a product is bound to be persistently short on liquidity. Why?

Well, banks lend long, borrow short. They keep just a fraction of deposits as reserves. And it works well. Very well, most times. It is only when depositors panic and knock on the bank’s door for their money on a massive scale, that crisis like this unfolds.

And this is what has happened.

With SVB collapsing, people have grown extra-cautious of banking failures the world over. Consequently, it was natural for Credit Suisse, in general, and European Banks, in particular, to come under scrutiny.

Why Europe?

  • Historical Under-Performance as compared to US Banks
  • Significant rise in the policy rate
  • Credit Squeeze

But why Credit Suisse in particular, you ask?

One reason is that it is ‘too big to fail’. Also, ‘to save’. This 167-year-old Swiss lender is 1 of the 30 Global Systematically Important Banks, with over 1.3 trillion Swiss Franc in AUM. Even before the crisis, Credit Suisse had been in investors’ bad books for several reasons.

  • Secular decline in share price since GFC 2008, touching all-time lows
  • String of scandals and management changes
  • A lot of bad investments
  • Huge decline in AUM & Total Income

Result? A 14-year high spread on its Credit Default Swap. What this basically means is that investors are willing to pay huge premiums for insurance against it defaulting.
Moreover, a huge fall in their bond prices has pushed yields higher, leading to higher interest rates per unit of borrowing historically.

Many have called this a ‘Lehman Moment’. Maybe yes. Maybe no. We need to understand that, unlike GFC, this is an interest rate and not a credit risk. We’re not in a recession either. Moreover, Liquidity and Coverage Norms are more stringent than what existed in 2008.

A $54 Billion Capital Infusion would definitely help revive their liquidity. But it would add to another problem - inflation. After 1.5 years of rate hikes, central banks the world over are considering cutting rates. This further adds to the woes of people reeling under already high inflation. It would be interesting to see how Central Banks tackle this problem.

As for revival, Credit Suisse particularly has got the backing of Qatar & Saudi-based strategic investors. It is also considering divesting stakes through its asset management arm. A Business Model pivot is a must. Swiss Regulators are also advocating for its merger with UBS, the world’s largest private bank.

How far will all this affect India?

With a mere Rs. 20700 Crore exposure (0.1% of India’s Banking Assets), there’s not a lot to worry about.

However, if untackled globally, it could stand to its name of being a ‘Lehman Moment’.
If not more disastrous.