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  • Writer's pictureTeam Stellar

The fall of Credit Suisse and its impact on Indian Economy

Updated: Jun 3, 2023

Credit Suisse was the second largest Swiss bank and one of the systemically important banks in the world. It was known as a bank for the ultra-wealthy elite in the world. Few weeks after Silicon Valley Bank, now this 167 years old bank was collapsed and bailed out by its rival, UBS bank, the largest Swiss bank wiping out USD17B bond investors money.

Two major banking collapses that came in just two weeks apart, on two different continents, sparked concern over whether there could be a repeat of the global financial crisis of 2008 where the fall of the BearStern and Lehman Brothers sparked the subsequent global financial crisis.

What happened to SVB?

SVB was a banker for many tech, healthcare and life sciences companies in the silicon valley. During the boom in 2020-2021 many tech and life science startups raised billions of dollars through IPOs , VCs or PE firms. Many of these companies deposited the majority of this money in SVB. It is evident from the fact that SVBs deposits grew from $65 billion in 2019 to $189 billion in 2021. All these deposits were short term in nature. Now SVB, invested this money in long dated US government bonds or US government backed mortgage bonds.

Two things happened in 2022 that impacted SVB

  1. Raising of interest rates by the US Fed. Interest rates in the US increased from near zero to 5% in a single year. The impact of this event is that the long duration bonds held by SVB fell significantly in value.

  2. collapse of the tech boom. In early 2022, all the VCs funding dried up and many of these startups started withdrawing their deposits from SVB. The impact of this event is that, to service these deposit withdrawal, SVB had to sell it’s long duration bonds which are in losses.

These two events created a significant Asset Liability Mismatch (ALM) for SVB where all its assets are held in long duration bonds with losses and liabilities are in short term. It couldn’t service these deposit withdrawals and eventually had to fail.

What happened to Credit Suisse?

Credit Suisse has not been doing well for many years. There were many CEO changes in the last 3 years, huge losses reported and its reputation has been hit by many scandals like the cocaine cash laundering case. Because of all these negative sentiments, there were huge deposit withdrawals in 2022. By the end of Dec 22, 150 billion dollars had been withdrawn.

With the fall of SVB, there was a severe negative sentiment across the banking system and this put a huge liquidity crisis in Credit Suisse. Its largest backer, Saudi National Bank refused to put additional liquidity putting more pressure and survival. Finally it was sold to UBS and wiped out 17 billion dollars of bond investors money.

What is the impact on the Indian economy?

With the fall of two major banks across the world, there were a lot of concerns around the word on the banking system. Let’s understand the impact of these bank failures on the Indian economy.

  1. There are no direct operations of SVB in India. However, many Indian startups held their deposits in SVB. The US government promised to back all these depositor's money. However, in the short term, these companies may face a liquidity crisis and may not expand their operations at the speed they wanted. They might even have had to borrow to run the day today operations in the short term. This has an impact on employment in India. There could be many layoffs in the startup space.

  2. Credit Suisse and UBS both have around 7000 each employees in India. Now, with the merger of both banks, there could be many job losses as the merged entity wants to reduce their operational expenses.

  3. Many Indian technology companies derive their majority of their revenue from the BFSI sector. For e.g TCS derives more than 40% revenue from BFSI. With the current stress in the banking sector across the word, many new projects may be put on hold or existing projects may be slowed down. This could put a lot of pressure on the margins of many Indian Technology services companies such as TCS ,Infosys and Wipro.

  4. There may not be a direct impact on the Indian banking system. However, with the negative sentiment across the banking system, there could be pressure on the markets in the short term and if the banking crisis in the west deepens ( already there were talks about Deutsche Bank :( ) this could turn out to be a full blown crisis and can last for longer and impact could be much higher.

Final thoughts

One Thing to remember is that these types of crisis have occurred in the past (2008), and the world has dealt with much worse issues (wars, covid etc). Markets move in cycles and no one knows when the cycle peaks or starts. As a long term investor, these are great opportunities to find solid companies that are available at dirt cheap valuations due to short term negative sentiment.


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