While the fallout of Credit Suisse being ignominiously hoovered up by its arch rival and next-door neighbour on downtown Zurich’s Paradeplatz are still somewhat fuzzy, what is increasingly clear is the knock-on effect of the deal on the global bond market.The biggest losers in the Credit Suisse fire sale are investors in the banking major’s riskiest bonds — called additional tier 1 or AT1 — who are faced with a $17 billion wipeout, potentially pushing Europe’s $275 billion market for these bonds into turmoil, with likely cascading impact across other geographies.This is the biggest wipeout yet for Europe’s AT1 market, overshadowing the only other write-down of this type of security — a $1.45 billion loss for bondholders of Spanish lender Banco Popular in 2017, when it was taken over by Banco Santander to prevent a Credit Suisse-like collapse.But there is a crucial difference. In the Banco Popular case, alongside bonds, equity was also written off; the Credit Suisse-UBS deal brokered by the Swiss financial regulator FINMA entails a complete write-down of the bank’s AT1 bonds, even as equity shareholders are set to receive about 3 billion Swiss francs.The action reverses what is typically a settled principle of write-downs: shareholders take the hit ahead of bondholders. While AT1 securities are considered the most risky among bonds, in the right-to-payouts list, AT1 bondholders come after senior bondholders but are ahead of equity shareholders — who are theoretically exposed to losses upfront.Reuters reported that UBS CEO Ralph Hamers told analysts that the decision to write down the AT1 bonds to zero was taken by FINMA, so it would not create a liability for the bank. But the regulator’s action goes against the traditional flow of things and threatens to plunge European bond markets into turmoil.Bond market impactAt nearly $130 trillion, the global bond market far outweighs the stock market in size, and plays an outsize role in the global financial system, especially in the way governments raise funds to manage their deficits. Rumblings in the bond markets could make it harder for other lenders to raise new AT1 debt, especially when the financial sector is facing tough times. AT1s, introduced in the aftermath of the 2008 global financial crisis as a bankable debt market instrument, pay higher interest as they carry greater risk than regular debt.Following FINMA’s announcement of the CHF 16 billion (about $17.3 billion) write-down of Credit Suisse’s AT1 bonds, European and Asian AT1 bonds tanked on Monday. UBS’ AT1s with a 2025 call slid to around 85 cents on the dollar compared with 93 cents on Friday, according to Tradeweb data quoted by Reuters.European vs US crisisThere are specific, and somewhat distinct, triggers for the unfolding banking sector crises on either side of the Atlantic. Credit Suisse was partly a victim of bond market losses, but multiple other factors were at play in its downfall: a poor governance record and chequered investment decision-making, which saw the bank lurching from scandal to scandal over much of the last decade, and it was repeatedly categorised as Europe’s weakest “systemically important” bank.In the US, the triggers were different. Over 90 per cent of deposits at Silicon Valley Bank (SVB) and Signature Bank were uninsured, and thereby prone to bank runs. These banks were also invested heavily in long-term government bonds — and when interest rates rose, the value of their bond portfolios declined. They sold some bonds to raise funds, and when these losses came to light, panicky depositors rushed to pull out.There was also an asset-liability mismatch in SVB’s case: being overly exposed to the same profile of funders and customers — venture capital funds and start-ups.Troubles in the banking sector and the wider bond market are likely to be high on the agenda of the US Federal Open Market Committee (FOMC) meeting on Wednesday. This is especially important as analysts point to a soft landing of the economy as being less of a possibility today than recessionary risk.Impact on Indian banksThe decision to write down Credit Suisse’s AT1 bonds to zero after the lender’s takeover by UBS may contribute to a higher cost of capital for banks, including Indian lenders, S&P Global Ratings said on Tuesday. The write-down will weigh on the pricing of such notes and spook investors, Citi analysts said in a note.In India, AT1 bonds of Yes Bank were written down in March 2020 after the Reserve Bank of India initiated a restructuring of the troubled lender. Since then, Indian banks have raised AT1 bonds at an up to 75 basis points premium over government bonds, Citi noted.Some bankers, however, do not see a major impact on the fundraising capabilities of Indian banks through AT1 bonds — one reason for the optimism is that the spread between regular bonds and AT1 bonds in India is less than 150 basis points, while in the EU and the US, it is 200-250 bps. Jefferies said in a note that Indian lenders have “limited dependence” on such securities.S&P noted that Indian lenders are capable of “enduring any potential contagion effects” emanating from the US banking turmoil and the Credit Suisse episode “given their manageable exposures” to global counterparts. “Strong funding profiles, a high savings rate, and government support are among the factors that bolster the financial institutions we rate,” the rating agency said, adding that domestic banks had sufficient buffers to withstand losses on their government securities portfolio due to rising interest rates.
On Monday, across the world, markets opened with a bit of nervousness, even as the takeover of the crisis-ridden Credit Suisse received the blessing of the local regulator and policymakers. While the acquirer, the Union Bank of Switzerland, has the full might of the Swiss National Bank behind it, it is anyone’s guess whether the merged entity will emerge as a poster child of a failed confidence-building measure or not. The reverberations of this deal, once it passes muster in jurisdictions outside Switzerland, will likely be felt for a long time.The demise of the 167-year-old bank —once a darling of markets in revered niche areas of wealth management and investment banking but one that had been haemorrhaging post the global financial crisis of 2008 — could also mark the beginning of a new era. It could bring to the fore major issues facing European banks that are battling lacklustre home markets and failed bets in mainland China, along with stiff competition from US banking behemoths.The wipeout of the entire portfolio of contingent convertible/AT1 bonds (used for bolstering the bank’s capital) worth $17 billion will erode confidence for new issuers, and raise the risk premia disproportionately in this $250 billion bond market.The CDS (credit default swap) of Credit Suisse, already approaching alarming high levels in recent days for protection against near-term default, may result in rating changes for financial markets and even sovereigns. Moreover, the demands for payment from diverse protection buyers can be daunting for UBS, SNB and the entire banking system wanting safe harbour in the storm.Lost in this kerfuffle is also the issue of leadership. In 2020, Tidjane Thiam, the then CEO of Credit Suisse, stepped down from the troubled Swiss bank, giving in to pressure from select quarters despite an impeccable record in bringing the beleaguered lender back on track.The series of events over the past few weeks seem to cast a shadow over the credibility of these central banks, their ability to provide regulatory forbearance, steer markets through turmoil and ensure well-orchestrated, coordinated monetary and fiscal policies.It is a bit disappointing that major central banks have done precious little to assuage market fears on a ticking time bomb — the maze of huge mark-to-market losses accruing in the books of banks during a regime of rapidly rising yields. Barely a week after giving Credit Suisse a 50 billion Swiss francs lifeline, the hurried blessing to the merger only shows that regulators need to plan their moves with clarity, in consultation with broader market participants to continue to remain in the driving seat.Against this background, it needs to be pointed out that the Reserve Bank of India and the government have worked in unison ever since the pandemic began to steer the economy. The playbook adopted by the RBI in times of crises, deployed at a systemic level and led by large and systemically important banks, has been the best-integrated policy response both in 2008 and 2020.In fact, short-term borrowing by the First Republic Bank — $30 billion from 11 different US banks — for a very short period of 90 days, appears short-sighted if we compare it to similar packages in India in 2008 and 2020 by the RBI when a consortium of banks hand-held ailing banks for multi-year periods.It would seem that both central banks and governments around the world can learn a trick or two from India in terms of coordinating monetary and fiscal policy responses during the pandemic. Ironically, fiscal policy dominance — a lexicon often used to describe India’s policy mistakes in the past — has now come to haunt Western economies. On a lighter note, economists seldom point out that the US had a brush with activist fiscal policies even in the 1960s when John F Kennedy’s economic council had four Nobel laureates to advise on policy.Coming back to government policies, the upward revision in the deposit insurance limit by the Indian government in 2020 needs to be seen in comparison to the US. For example, as per independent research estimates, smaller bank deposits in the US are insured in the range of 30-45 per cent only. In contrast, smaller bank deposits in India such as regional rural banks, cooperative banks and local area banks are better protected at 82.9 per cent, 66.5 per cent, and 76.4 per cent respectively, while public sector banks, which have a large proportion of customers from rural, urban and semi-urban areas have better customer deposits protection in comparison to private banks.Further, India’s deposit insurance coverage to per capita income ratio at 2.53 is one of the highest across the world. Brazil, which has the highest insurance coverage ratio, has a far more expansive definition, which raises questions of serviceability if any contagion reaches its shores.Indian banks are also in sound financial health. Moreover, when compared to other major countries, India has the least foreign claims, both on counterparty basis, and on a guarantor basis. Additionally, our ratio of foreign claims to domestic claims is also the least among countries signalling that our banking and financial system is very disciplined, and that no fear that an international balance sheet contagion can originate from here.It needs to be pointed out that banks in emerging economies are now on track for more robust performance on the back of a robust regulatory framework, greater policy initiatives, framed in coordination by both regulators and governments.The writer is Group Chief Economic Advisor, State Bank of India. Views are personal
On Monday, across the world, markets opened with a bit of nervousness, even as the takeover of the crisis-ridden Credit Suisse received the blessing of the local regulator and policymakers. While the acquirer, the Union Bank of Switzerland, has the full might of the Swiss National Bank behind it, it is anyone’s guess whether the merged entity will emerge as a poster child of a failed confidence-building measure or not. The reverberations of this deal, once it passes muster in jurisdictions outside Switzerland, will likely be felt for a long time.The demise of the 167-year-old bank —once a darling of markets in revered niche areas of wealth management and investment banking but one that had been haemorrhaging post the global financial crisis of 2008 — could also mark the beginning of a new era. It could bring to the fore major issues facing European banks that are battling lacklustre home markets and failed bets in mainland China, along with stiff competition from US banking behemoths.The wipeout of the entire portfolio of contingent convertible/AT1 bonds (used for bolstering the bank’s capital) worth $17 billion will erode confidence for new issuers, and raise the risk premia disproportionately in this $250 billion bond market.The CDS (credit default swap) of Credit Suisse, already approaching alarming high levels in recent days for protection against near-term default, may result in rating changes for financial markets and even sovereigns. Moreover, the demands for payment from diverse protection buyers can be daunting for UBS, SNB and the entire banking system wanting safe harbour in the storm.Lost in this kerfuffle is also the issue of leadership. In 2020, Tidjane Thiam, the then CEO of Credit Suisse, stepped down from the troubled Swiss bank, giving in to pressure from select quarters despite an impeccable record in bringing the beleaguered lender back on track.The series of events over the past few weeks seem to cast a shadow over the credibility of these central banks, their ability to provide regulatory forbearance, steer markets through turmoil and ensure well-orchestrated, coordinated monetary and fiscal policies.It is a bit disappointing that major central banks have done precious little to assuage market fears on a ticking time bomb — the maze of huge mark-to-market losses accruing in the books of banks during a regime of rapidly rising yields. Barely a week after giving Credit Suisse a 50 billion Swiss francs lifeline, the hurried blessing to the merger only shows that regulators need to plan their moves with clarity, in consultation with broader market participants to continue to remain in the driving seat.Against this background, it needs to be pointed out that the Reserve Bank of India and the government have worked in unison ever since the pandemic began to steer the economy. The playbook adopted by the RBI in times of crises, deployed at a systemic level and led by large and systemically important banks, has been the best-integrated policy response both in 2008 and 2020.In fact, short-term borrowing by the First Republic Bank — $30 billion from 11 different US banks — for a very short period of 90 days, appears short-sighted if we compare it to similar packages in India in 2008 and 2020 by the RBI when a consortium of banks hand-held ailing banks for multi-year periods.It would seem that both central banks and governments around the world can learn a trick or two from India in terms of coordinating monetary and fiscal policy responses during the pandemic. Ironically, fiscal policy dominance — a lexicon often used to describe India’s policy mistakes in the past — has now come to haunt Western economies. On a lighter note, economists seldom point out that the US had a brush with activist fiscal policies even in the 1960s when John F Kennedy’s economic council had four Nobel laureates to advise on policy.Coming back to government policies, the upward revision in the deposit insurance limit by the Indian government in 2020 needs to be seen in comparison to the US. For example, as per independent research estimates, smaller bank deposits in the US are insured in the range of 30-45 per cent only. In contrast, smaller bank deposits in India such as regional rural banks, cooperative banks and local area banks are better protected at 82.9 per cent, 66.5 per cent, and 76.4 per cent respectively, while public sector banks, which have a large proportion of customers from rural, urban and semi-urban areas have better customer deposits protection in comparison to private banks.Further, India’s deposit insurance coverage to per capita income ratio at 2.53 is one of the highest across the world. Brazil, which has the highest insurance coverage ratio, has a far more expansive definition, which raises questions of serviceability if any contagion reaches its shores.Indian banks are also in sound financial health. Moreover, when compared to other major countries, India has the least foreign claims, both on counterparty basis, and on a guarantor basis. Additionally, our ratio of foreign claims to domestic claims is also the least among countries signalling that our banking and financial system is very disciplined, and that no fear that an international balance sheet contagion can originate from here.It needs to be pointed out that banks in emerging economies are now on track for more robust performance on the back of a robust regulatory framework, greater policy initiatives, framed in coordination by both regulators and governments.The writer is Group Chief Economic Advisor, State Bank of India. Views are personal
ExplainSpeaking-Economy is a weekly newsletter by Udit Misra, delivered in your inbox every Monday morning. Click here to subscribeDear Readers,Overnight news came out that in a distress sale, Credit Suisse, Switzerland’s second largest bank and one of the most influential banks in global history, was sold to UBS, which is Switzerland’s largest bank and a long-time rival. The deal was hurriedly brokered by Swiss government and regulators in a bid to not just contain the crisis of confidence in Credit Suisse, which reportedly faced withdrawals of close to $10 billion last week, but also to stop the contagion to other banks.UBS will be paying around $3.2 billion to Credit Suisse. According to The Wall Street Journal, “The Swiss government said it would provide more than $9 billion to backstop some losses that UBS may incur by taking over Credit Suisse. The Swiss National Bank also provided more than $100 billion of liquidity to UBS to help facilitate the deal.”This is a spectacular collapse for the 166-year old bank. But what is even more stunning is that this is the third major bank that has collapsed in just the past 10 days.On March 10, Silicon Valley Bank (SVB), US’ 16-largest bank, collapsed after just a single day of stress following a classic bank run in which depositors demanded as much as $42 billion in one go.By the time the US regulators came around to dealing with SVB, which was the second-biggest collapse after the iconic Lehman Brothers, another bank called Signature Bank had to be seized after depositors demanded 20% of all its deposits. This made Signature Bank the third largest bank to collapse in the US.A lot of Signature Bank’s dealing was in cryptocurrencies and regulators believed that unless it was closed down, the run on Signature Bank could spread further. To some extent it did with the share prices of First Republic Bank nosedived within hours.The US Federal Reserve, the US’ central bank like RBI is in India, tried to get 12 large banks to help First Republic but with each passing day, credit rating agencies have been downgrading First Republic. Overnight, CNBC reported that S&P had downgraded First Republic to junk status while saying that even the $30 billion infusion may not solve the bank’s problems.There are two ways to look at these bank collapses.1. One is to look at the specifics of each bank. When one does that one will find that these banks (that is, their management) are paying the price of either undertaking risky bets or ignoring prudential norms or indulging in outright fraud or a combination of these. All these missteps eventually hit profitability and eroded investor confidence.Let’s take the case of Credit Suisse.Read this detailed explainer published in October 2022 when it was widely expected that Credit Suisse was about to collapse. Even though it managed to survive at that time, unfortunately, the news trickling out of Credit Suisse continued to stay negative. For instance, when probed by the US’s market regulator, the Securities and Exchange Commission, Credit Suisse admitted in March this year that the bank’s cash flow statements suffered from “material weakness” (read: inaccuracies).In the case of Silicon Valley Bank too, there is prima facie evidence of both mismanagement and fraud.For instance, SVB put almost all its deposits — customer deposits shot up from $60 billion in 2020 to over $200 billion thanks to the tech startup boom that happened in the wake of Covid — in long-term US government bonds. While this seems like a safe investment, it suffered from two problems.One, it made the bank vulnerable to bank runs because deposits can be withdrawn within hours while the bonds are stuck for the long-term (say 10, 20 or 30 years). Moreover, when SVB bought the long-term bonds, the prevailing interest rates were quite low but in 2022, the US Federal Reserve sharply hiked short-term interest rates. This meant that previously floated long-term bonds (which paid lower interest rate) were worth less. So when SVB decided to sell their long-term bonds prematurely — in order to meet with the withdrawal demands by depositors — it started to book heavy losses.Further, SVB could not spot this terrible risk in its portfolio because it allowed the position of Chief Risk Officer to stay vacant between April 2022 and January 2023. It is noteworthy that this was precisely the time when the Fed was frantically raising interest rates. But there was no one at SVB to take notice.The shareholders are also accusing the management of fraud because it has been reported that the top management got its bonuses just before the collapse. In fact, some of the top management even sold their stocks before the collapse.2. The second way to look at these collapses is to look at the macro picture. The global economy has had a very long period of loose monetary policy (lots of money being printed by central banks and credit being made available at near zero percent interest rate) followed by a sudden and very sharp monetary tightening (read a sharp rise in interest rate across the world as well as reduced money supply).Just like it is said that a rising tide (economies being flooded with cheap money) lifts all boats, similarly a fast receding tide is starting to leave many boats stranded. Cheap money allowed banks and businesses to undertake risky bets. Many are realising they do not have enough time to deal with the sudden spike in funding cost. At one level, the spike in interest rate is too much and happening all too fast for banks and businesses to adjust and recalibrate their actions.That is why you might be reading of growing fears of recession and financial instability.To be sure, economic booms fuelled by extended periods of cheap credit often culminate in economic collapses. In the book titled “The price of time: The real story of interest”, Edward Chancellor writes: “Modern central bankers fret about the twin evils of inflation and deflation. Their goal is to achieve a stable price level. Yet over the past hundred years, several great credit booms – including the credit boom of the 1920s, Japan’s bubble economy of the 1980s and the global credit bubble preceding the 2008 Lehman crisis – have occurred at times when inflation was quiescent. On each of these occasions, the lack of inflation encouraged central banks to maintain interest rates below the economy’s growth rate. Each of these credit booms ended in disaster.”Any financial system runs on trust. If that trust is shaken, things like a bank run can happen. To be sure, a bank run essentially means all depositors wanting to withdraw their money at the same time. Of course, no bank can furnish such a demand because banks don’t sit on all the money they get from depositors; instead they lend it out to earn some income of their own.The collapse of these banks has eroded that trust. People and policymakers alike are worried about the spread of this contagion.In particular, the central banks across the world are caught in a tough spot. On the one hand their primary mandate is to bring down inflation and restore price stability in the economy. On the other hand, they are finding that their sharp monetary tightening is increasingly catching banks and financial players off-guard.While it is true that central banks want the economies to slow down so that inflation comes down, what is happening is quite worse. Sudden bank runs and collapses point to the possibility of people losing confidence in the banking and financial system. While this will also slow down the economy, it would be a particularly bad way of slowing down the economy because it would come at the cost of people’s confidence in the system, which takes much longer to reestablish, than just recouping some amount of GDP growth.To be sure, the situation is not as bad as the 2008 crisis when the underlying asset itself — the home mortgages — were losing value. Still, central banks are aware that sudden bank runs and ensuing panic can derail even the most robust financial system.As such, immediately following the sale of Credit Suisse, the US Federal Reserve shared a press release that stated: “The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.”In simple language, key central banks have come together to ensure that US dollars can flow from one bank to another in case dollars are needed. This is an emergency arrangement and is aimed to not just calm the down jittery consumers but also bolster the confidence of nervous policymakers and bankers.Despite the imminent fall of Credit Suisse, the European Central Bank decided to rate interest rates by 50 basis points last week.This week, on March 22, the US Fed is supposed to unveil its monetary policy review.Before the collapse of the Silicon Valley Bank, most observers expected another 50 basis points increase from the Fed. That’s because US inflation has not decelerated as fast as the Fed wanted.But the events of the past 10 days have thrown the proverbial spanner. As the actions of last night suggest, the Fed and other central banks are acutely concerned about the financial system getting frozen and banks running out of money because of sudden runs. In such a scenario, raising interest rates may be considered very risky because it will further raise borrowing costs.However, if the Fed pauses its fight against inflation, it may well worsen the inflation problem.So it all depends on how the Fed reads the situation.If the Fed believes that the banking and financial system is essentially robust and that it can easily deal with one or two faltering banks by providing them liquidity support then it could decide to stick to its path of monetary tightening and possibly raise interest rates by 25 basis points instead of 50.If it believes the financial system is in grave danger, it may decide to pause.Either way, expect more turmoil in the coming days especially in terms of stock market behaviour.Share your thoughts and queries at udit.misra@expressindia.com.Until next week,Udit
The proposed takeover of Credit Suisse by UBS – both Swiss banks – is expected to witness consolidation of the Indian operations of both the banks. While UBS and Credit Suisse are present in India in the investment banking and wealth management areas, the latter has a banking licence with just one branch operating in Mumbai.In June 2013, UBS which got a banking licence from the RBI in 2009, wound up its banking operations in India and returned the licence to the RBI. The decision to exit banking in India may be partly linked to a broader global move driven by stricter capital requirements that had been brought in as part of Basel III norms. These norms have forced a number of foreign banks to curtail their operations in markets like India and also pare down investments in Indian companies.UBS was one of the first to look at a complete exit from the banking business in India. UBS Securities, which has a separate investment banking licence issued by the Securities and Exchange Board of India, has remained operational. UBS had faced a probe in India in an alleged money laundering case involving Hasan Ali Khan, a controversial businessman.UBS first decided to ramp up its commercial banking business in late 2010 when it started to actively lend to large Indian corporates. The lender also moved aggressively into the high-yield loan business over 2011 and 2012. The businesses, however, failed to generate adequate returns and this prompted the decision to exit both businesses. According to data provided by the RBI’s Profile on Banks report, UBS had outstanding advances of $6.2 billion at the end of March 2012.In October 2012, UBS decided to shut down its fixed-income business in India as part of a global decision to exit the fixed-income space.In January 2013, Credit Suisse received a license from the Reserve Bank of India to establish a bank branch in Mumbai. It has over Rs 20,000 crore in assets (12th among foreign banks), a presence in the derivatives market and funded 60% of assets from borrowings, of which 96% is up to two months, research firm Jefferies said.“Still, it is small for the banking sector with 0.1% share of assets. We watch out for liquidity issues and any rub-off on counter-party risk assessment (especially in derivatives) and the deposit market may move towards larger, quality banks,” Jefferies said.Credit Suisse is present as a branch and has a 1.5% share among foreign banks’ assets and 0.1% in sector assets. Jefferies said, “Credit Suisse has only one branch in India and has a total asset base of over Rs 20,000 crore that is 12th largest among foreign banks with 1.5% share in foreign banks’ assets and 0.1% in sector assets. 70% of assets are in G-Secs (short term) and have 0 NPLs.”Borrowings in India form 73% of total liabilities and 96% of borrowings have a tenure of up to 2 months. The deposit base of Credit Suisse is smaller at Rs 2,800 crore, forming 20% of total liabilities and 70% are from subsidiaries.UBS Securities India Pvt Ltd is a Securities and Exchange Board of India (SEBI) registered stock broker and holds membership in the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). UBS provides corporate, institutional and wealth management clients with expert advice, innovative solutions, execution and comprehensive access to international capital markets in India. India is one of the technology hubs of UBS with a sizeable workforce.Credit Suisse Securities (India) Pvt Ltd, incorporated in December 1996, is involved in activities auxiliary to financial intermediation, except insurance and pension funding. It already offers wealth management, investment banking and asset management in India, serving high-net-worth, corporate and institutional clients.These two firms are likely to be integrated as the global merger process takes shape in the coming months. Neelkanth Mishra, Co-head of the Asia-Pacific strategy of Credit Suisse Securities, recently decided to step down from his role and move to head the research wing at Axis Bank.As many as 45 foreign banks are present in India, but they have a relatively smaller presence in India with a 6% share in total assets, 4% in loans and 5% in deposits. They are more active in the derivative markets (forex and interest rates) where they have a 50% share. Most of them are present as branches of the parent bank with only a few present as wholly-owned subsidiaries.Nevertheless, they retain capital, liquidity and make similar annual report disclosures as Indian banks, Jeffries said. The top five foreign banks in India by assets are HSBC, Citibank (it has now sold its consumer business to Axis), Standard Chartered, Deutsche Bank and J.P. Morgan Chase which is also the largest US bank.“Given the relevance of Credit Suisse to India’s banking sector, we see softer adjustments in assessment of counterparty risks, especially in the derivative market. We expect RBI to keep close watch on liquidity issues, counterparty exposures and intervene as necessary. This may also lead to institutional deposits moving more towards larger, quality banks,” Jefferies said.
At the Bundesplatz, the biggest square in Bern’s fabled old town, right opposite two important national institutions – the Swiss Federal Parliament and the Swiss central bank edifice – is the Credit Suisse building, with just a plaza laced with fountains and public chairs separating the Swiss banking regulator and the country’s second-largest bank. So, it was not surprising that the Swiss central bank stepped in with a $54 billion lifeline for Credit Suisse early Thursday after a continuing slide in the lender’s shares triggered growing concerns about a developing bank deposit crisis.In its statement early Thursday, Credit Suisse said it is “exercising its option to borrow” from the Swiss National Bank up to 50 billion Swiss francs (around $54 billion). Why this is crucial because an enveloping crisis at the Swiss bank’s problems has the potential to shift the focus for investors and regulators from the US, where the crisis of at least three mid-sized banks has led to fears of contagion, to Europe now.The Credit Suisse-led selloff in bank shares raised the prospect of a spillover of the banking crisis that started in America to the other side of the Atlantic.On Wednesday, shares of Credit Suisse plunged to a fresh all-time low for the second consecutive day after a top investor in the embattled lender said it would not be in a position to provide more cash due to regulatory red lines.The Swiss bank’s largest investor, the Saudi National Bank, said yesterday it could not provide the Swiss bank with any further financial assistance, according to a Reuters report. “We cannot because we would go above 10%. It’s a regulatory issue,” Saudi National Bank Chairman Ammar Al Khudairy told Reuters Wednesday.The Saudi National Bank had taken a 9.9 per cent stake in Credit Suisse last year as part of the Swiss lender’s $4.2 billion capital raise to fund a strategic overhaul amid a sagging investment banking performance and a bevvy of risk and compliance failures.After European markets closed Wednesday, Swiss regulators said that Credit Suisse “currently meets capital and liquidity requirements” and that the Swiss National Bank will provide additional liquidity, if needed. This came at a time when there was a concern of a spiralling banking sector crisis, with a broader sell-off among European lenders, including France’s Societe Generale, Spain’s Banco de Sabadell and Germany’s Commerzbank Wednesday, according to Bloomberg data.Some Italian banks Wednesday were also subject to automatic trading stoppages, including UniCredit, FinecoBank and Monte dei Paschi, it was reported.In a joint statement late on Wednesday, the Swiss financial regulator FINMA and the country’s central bank tried to ease investor fears around Credit Suisse, saying it “meets the capital and liquidity requirements imposed on systemically important banks and that the bank could access liquidity from the central bank if needed.Credit Suisse said it “welcomed” the statement of support from the Swiss National Bank and FINMA. The lifeline is extremely significant as Credit Suisse would be the first major global bank to be given such a credit line since the 2008 financial crisis – even though western central banks have extended liquidity support to banks during times of market stress since the crisis, including during the pandemic-triggered stock rout.Founded in 1856, Credit Suisse has had a troubled history, having braced multiple scandals in recent years over different issues, including money laundering charges. It reported having lost money in the last two years and had issued a warning of staying in the red at least till 2024. The new crisis could mean a longer road towards profitability, or even solvency, for the embattled bank.With the crisis, traders are now expecting that the US Federal Reserve, which just last fortnight was expected to step up its interest-rate-hike plan in the face of stubborn inflation, may be forced to hit pause and even contemplate a cut in rates. Also, the Credit Suisse rout had triggered concerns about the health of Europe’s banking sector and a contagion effect.Reuters, however, reported Ralph Hammers, CEO of Credit Suisse rival UBS (Switzerland’s largest bank) as saying the market turmoil has seen incoming deposits while Deutsche Bank CEO Christian Sewing maintained that the German lender has also seen fresh funds come its way.Established in India in 1997, Credit Suisse has offices in Mumbai, Pune and Gurgaon, with vendor offices in Bangalore, Hyderabad and Kolkata. India, according to the bank, represents “the second-largest footprint for Credit Suisse outside of Switzerland” and that it is “an important recruitment centre” for the bank globally. A lifeline to the bank is, therefore, good news from that perspective, at least in the short term.Also, there could be a cascading impact of global regulatory action, such as a pause in the ratings hikes, that would have a bearing on the Reserve Bank of India’s stance on market rates and outlook for the markets. But a deepening banking crisis in the US or the EU could mean fresh troubles for lenders in other geographies, including India. A banking crisis could, in turn, have a deleterious effect on the economic recovery that is currently underway.
Indian startups had deposits worth about $1 billion with embattled Silicon Valley Bank and the country’s deputy IT minister said he had suggested that local banks lend more to them going ahead.California banking regulators shut down Silicon Valley Bank (SVB) on March 10 after a run on the lender, which had $209 billion in assets at the end of 2022.Depositors pulled out as much as $42 billion on a single day, rendering it insolvent. The U.S. government eventually stepped in to ensure that depositors had access to all their funds.“The issue is, how do we make startups transition to the Indian banking system, rather than depend on the complex cross border U.S. banking system with all of its uncertainties in the coming month?” India’s state minister for technology, Rajeev Chandrashekhar said late Thursday night in a Twitter spaces chat.Hundreds of Indian startups had more than a billion dollars of their funds in SVB, according to his estimate, Chandrashekhar said.Chandrashekhar met more than 460 stakeholders this week, including startups affected by SVB’s closing, and said he had passed on their suggestions to Finance Minister Nirmala Sitharaman.Indian banks could offer a deposit-backed credit line to startups that had funds in SVB, using those as collateral, Chandrashekhar said, citing one of the suggestions he had passed on to the Finance minister.India has one of the world’s biggest startup markets, with many clocking multi-billion-dollar valuations in recent years and getting the backing of foreign investors, who have made bold bets on digital and other tech businesses.
When the global financial crisis, triggered by the Lehman collapse, roiled the banking system across the world in 2008, India remained a safe haven with domestic banks showing strength and resilience on the back of sound and stringent regulatory practices. When Silicon Valley Bank (SVB) and Signature Bank of the United States collapsed last week, Indian banks remained unaffected despite the global interconnectedness in the financial sector.Are top Indian banks, especially the domestic systemically important banks (D-SIBs) – popularly known as too-big-to-fail — with operations outside, safe and sound in the era of start-ups and digitisation, especially in the wake of ratings major Moody’s fresh warning of more pain ahead for the US banking system after the collapse of SVB?The resilience of Indian banksThe reasons for SVB’s failure are unlikely to play out in India as domestic banks have a different kind of balance sheet structure, according to bankers. “In India, we don’t have a system where deposits are withdrawn in such a bulk quantity,” said a senior official from a state-run bank.The banker said that unlike in the US, where a large portion of bank deposits are from corporates, household savings constitute a major part of bank deposits in India. Today, a large part of deposits is with public sector banks and the remaining deposits are with very strong private sector lenders like HDFC Bank, ICICI Bank and Axis Bank. So, there is no need for customers to worry about their savings, he said, adding that whenever banks have faced any issue, the government has come to their aid. “In banking, confidence is an important factor. You don’t need any capital if the trust is 100 per cent, and no amount of capital will save you if the trust is lost,” said an official from another state-run bank.“In India, the approach of the regulator has generally been that the depositors’ money should be protected at any cost. The finest example is the rescue of Yes Bank where a lot of liquidity support was provided,” said Rajnish Kumar, former chairman of the State Bank of India (SBI).The SVB issue, however, created nervousness in the stock markets with bank shares taking a hit and investors losing money in the process.On September 30, 2008, when the global financial crisis was at its peak, then finance minister P Chidambaram and regulators SEBI and the RBI stepped in to soothe financial markets after the benchmark Sensex plunged 3.5 per cent to its lowest levels in two years and panic gripped ICICI Bank customers, who queued up outside ATMs in certain cities to withdraw deposits. Their assurances helped, and the market closed 2.1 per cent up.In a rare statement, the RBI said the country’s largest private bank was safe and had enough liquidity in its current account with the central bank to meet depositors’ requirements. “The RBI has arranged to provide adequate cash to ICICI Bank to meet the demands of its customers at its branches and ATMs,” the central bank said on safety of individual banks. ICICI Bank closed 8.4 per cent higher that day, rebounding from a two-year low.Which are the D-SIBs?The RBI has classified State Bank of India, ICICI Bank and HDFC Bank as D-SIBs. The additional Common Equity Tier 1 (CET1) requirement for D-SIBs was phased-in from April 1, 2016, and became fully effective from April 1, 2019. The additional CET1 requirement will be in addition to the capital conservation buffer. This means these banks will have to earmark additional capital and provisions to safeguard their operations.Learning from the experience of the global crisis, the Reserve Bank issued a framework for dealing with D-SIBs on July 22, 2014. The D-SIB framework requires the Reserve Bank to disclose the names of banks designated as D-SIBs starting from 2015 and place these banks in appropriate buckets depending upon their Systemic Importance Scores (SISs). Depending on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it.Based on data collected from banks, as on March 31, 2017, HDFC Bank was also classified as a D-SIB, along with SBI and ICICI Bank. The current update is based on the data collected from banks as on March 31, 2022.Basel-based Financial Stability Board (FSB), an initiative of G20 nations, in consultation with Basel Committee on Banking Supervision (BCBS) and national authorities, identified the list of global systemically important banks (G-SIBs). There are 30 G-SIBs as of now. They include JP Morgan, Citibank, HSBC, Bank of America, Bank of China, Barclays, BNP Paribas, Deutsche Bank and Goldman Sachs. However, no Indian bank figures in the G-SIB list.Why are SIBs created?The financial system has global linkages. During the 2008 crisis, the problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy. Government intervention was considered necessary to ensure financial stability in many jurisdictions. The cost of public sector intervention and consequential increase in moral hazard required that future regulatory policies should aim at reducing the probability of failure of SIBs and the impact of the failure of these banks, according to the RBI.In October 2010, FSB recommended that all member countries needed to have in place a framework to reduce risks attributable to Systemically Important Financial Institutions (SIFIs) in their jurisdictions.SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets. However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future. These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them, says the RBI note on D-SIBs.While Basel-III Norms have prescribed a capital adequacy ratio (CAR) – the bank’s ratio of capital to risk — of 8 per cent, in India, the RBI has gone one step ahead and mandated the CAR for scheduled commercial banks to be 9 per cent and for public sector banks 12 per cent.Why are precautions needed?The failure of a large bank anywhere can have a contagion effect across the world. The impairment or failure of a bank will more likely damage the domestic economy if its activities constitute a significantly large share of domestic banking activities. Therefore, there is a greater chance that impairment or failure of a larger bank would cause greater damage to the financial system and domestic real economy. The impairment or failure of a bank with large size is also more likely to damage confidence in the banking system as a whole. Size is a more important measure of systemic importance than any other indicators, and therefore, size indicators will be assigned more weight than the other indicators, according to the RBI.Impairment or failure of one bank may have the potential to increase the probability of impairment or failure of other banks if there is a high degree of interconnectedness (contractual obligations) with other banks. This chain effect operates on both sides of the balance sheet. There may be interconnections on the funding side as well as on the asset side of the balance sheet. The larger the number of linkages and size of individual exposures, the greater is the potential for the systemic risk getting magnified, which can lead to nervousness in the financial sector.The greater the role of a bank as a service provider in underlying market infrastructure like payment systems, the larger the disruption it is likely to cause in terms of availability and range of services and infrastructure liquidity following its failure. Also, the costs to be borne by the customers of a failed bank to seek the same service at another bank would be much higher if the failed bank had a greater market share in providing that particular service, the central bank says.How are D-SIBs selected?The RBI’s assessment of systemic importance of banks is a two-step process. In the first step, a sample of banks to be assessed for their systemic importance will be decided. All the banks are not considered as many smaller banks would be of lower systemic importance and burdening these banks with onerous data requirements on a regular basis may not be prudent. Once the sample of banks is selected, a detailed study to compute their systemic importance is initiated. Based on a range of indicators, a composite score of systemic importance for each bank in the sample will be computed. The banks having systemic importance above a threshold will be designated as D-SIBs.As per the RBI’s process, D-SIBs would be segregated into different buckets based on their systemic importance scores, and subject to loss absorbency capital surcharge in a graded manner depending on the buckets in which they are placed. A D-SIB in the lower bucket will attract lower capital charge and a D-SIB in the higher bucket will attract higher capital charge. The banks will be selected for computation of systemic importance based on the analysis of their size (based on Basel III Leverage Ratio Exposure Measure) as a percentage of GDP. Banks having a size beyond 2% of GDP will be selected in the sample.
Over 48 hours last week, after California-based Silicon Valley Bank (SVB) failed, hundreds of Indian startups with millions of dollars stuck in accounts at the bank went to the brink and back. Without the intervention of the United States government, these businesses were staring at mass layoffs and, in some cases, extinction. The crisis seems to have been averted — for now.SVB, which was founded in 1983, dealt with high-growth, high-risk businesses such as technology startups. The bank offered an easy way for startups in India, especially those in the Software as a Service (SaaS) sector who have a number of US clients, to park their cash — as they could set up accounts without a US Social Security Number or Income Tax Identification Number.A very strong network of lawyers and accountants in the US actively recommended SVB for a fee to high-growth startups, the founder of an Indian startup told The Indian Express.Basically, SVB dealt with businesses that banks traditionally avoided given the perceived risk of failure, and lent to startups when other sources of funding were hard to come by. “I’d say until a few years ago, it was only SVB; it is only now that startups have other funding options,” this founder said.Based on the goodwill of having been there for these businesses when traditional banks stayed away, SVB received huge deposits during the tech boom of 2020-21. It invested the bulk of the proceeds in long-term US Treasury bonds while interest rates were low, and kept only a small volume of deposits on hand.This strategy to earn returns worked until the Federal Reserve, the US central bank, started to raise interest rates last year to cool runaway inflation. At the same time, startup funding began drying up, which put pressure on many of the bank’s clients, who started to withdraw their money. To honour the requests, SVB was forced to sell some of its investments at a time when their value had declined, losing almost $2 billion in the process.That triggered mass withdrawal requests to the tune of $42 billion in a single day as depositors rushed to redeem their parked funds. But not everyone was successful.Panic in IndiaThe US government shut down the bank on Friday, and the Federal Deposit Insurance Corporation (FDIC) asked companies with accounts containing more than $250,000 to contact a toll-free number. For hundreds of Indian startups with a lot more than $250,000 in their SVB accounts, this was the beginning of a long wait — with no certainty how long it would take to recover their deposits.“It is 4 am now and we have been on hold at the toll-free number given by the FDIC for over half an hour. We have around $2 million in our SVB account and need that to create the payroll,” a startup founder had told this paper early in the weekend.It was obvious that not having access to that money would mean firing a large number of employees. The startup ecosystem was already going through a funding winter that had forced more and more businesses to dip into their savings.In a poll run on a WhatsApp group of Indian founders whose startups were incubated by the US-based technology startup accelerator YCombinator (YC), the majority said they had more than $250,000 with SVB, with some having parked more than $1 million in their accounts. SVB was also a preferred personal banker for several ultra high net-worth individuals in the technology space.There was panic.“I did not sleep for almost two days. I was constantly on calls with lawyers and accountants to figure out a way to save the company,” another founder said, requesting anonymity. His business had almost $3 million in its SVB account.Finally, reliefThe insured amount of $250,000 was always going to be inconsequential. As of December 2022, SVB had $209 billion in total assets and about $175 billion in total deposits, 89 per cent of which was uninsured.Depositors had to be helped in order to prevent a contagion effect from severely impacting America’s banking system. But given the learnings from the 2008 financial crisis, and the public sentiment around bank failures, a bailout would not have been unpopular.Finally on Sunday night, a plan was revealed. Instead of a full government bailout that would have required taxpayer money, the Fed announced it would make available additional loans to eligible depository institutions to help assure that banks have the ability to meet the needs of all their depositors.A new entity called the Bank Term Funding Program (BTFP) will offer loans of up to one year to banks, savings associations, credit unions, and other eligible institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasuries, agency debt, and mortgage-backed securities.The Department of the Treasury will make available up to $25 billion from the Exchange Stabilisation Fund as a backstop for the BTFP. However, the Fed said it did not anticipate a need to draw on these backstop funds.Thanks to the manoeuvre, Indian startups said they could manage to withdraw their money. The founder of YC-backed startup said the process of withdrawal was smooth, although wait times were long given the increased load on the bank’s servers.A number of these firms are currently wiring their money from SVB to accounts in other US-based banks, given that SWIFT transfers — a secure and standardised method of sending or receiving money to/ from banks anywhere in the world — do not work for SVB accounts.“We’re all just wiring to another US bank account and then deciding what to do. I’ve heard of other companies succeeding with wires. And we’ve so far had a great experience switching to Brex since we already had their credit card,” one of the founders quoted above said.Govt steps inOn Tuesday, the Ministry of Electronics and Information Technology held a meeting with the affected startups to discuss the liquidity issues they were facing. In a submission to the Finance Ministry, the IT Ministry is likely to emphasise the need to devise a plan on how the Reserve Bank of India can get domestic banks to offer loans to these startups.The IT Ministry is also expected to recommend exploring the option of startups being allowed to transfer money from their SVB accounts to Indian banks without facing taxation issues, and to urge the Finance Ministry to allow overseas branches of Indian banks to accept deposits from these startups.The IT Ministry will also create an email hotline and a form for those who still face liquidity issues.
