Credit Suisse Sold! Bank Collapse Sets Of Major Triggers Around The World, Including India; Are We Unquestionably Staring At A Recession Now?
In days following the collapse of Signature Bank and SVB in the United States, came news that Switzerland's Credit Suisse too was floundering. In a hurried deal brokered by the Swiss government and regulators, it has now been sold to UBS, Switzerland's largest bank and also long time rival. All in attempts to not only contain the crises of shaky confidence in Credit Suisse but also to stop the contagion to other banks. However, Credit Suisse's collapse may set a major trigger worldwide, including in India.
Recent news reports have caused significant concern about the banking ecosystem worldwide. After the much publicized and jaw-dropping collapse of one of the startup’s favourite banks, SVB, comes the spectacular collapse of 166-year-old and one of the most influential banks in global history – Credit Suisse!
This is the third major bank that has collapsed in just the past ten days; although in a hurried attempt to restore confidence in Credit Suisse and, more importantly, to contain the contagion to other banks, the Swiss government and regulators sold the same to UBS which will be paying around $3.2 billion to Credit Suisse.
Additionally, the Swiss government said it would provide more than $9 billion to backstop some losses that UBS may incur by taking over Credit Suisse.
At the same time, the Swiss National Bank also provided more than $100 billion of liquidity to UBS to help facilitate the deal.
However, while these are prominent banks in developed economies, several ask if the collapse of these banks will have an impact on India.
The answer to this question is, sadly, yes, it may!
Here’s breaking down the impact of the bank collapse in the last ten days!
Firstly, the timing could not have been better. News reports on a global level have been coming up repeatedly suggesting that we may be headed towards a recession, and with the collapse of three significant banks one after the other in close succession implies that we may no longer be able to go around recession any more.
The collapse of Silicon Valley Bank, the Signature bank and the looming crisis at Credit Suiss has resulted in investors worried about the stock markets around the world, including the nifty fifty, which has plunged almost 10% since the collapse of SVB.
Secondly, before we can even be sure about the recession creeping in on us is the definite impact and a more critical worry on borrowing, especially for the United States Economy.
United States Economy And Banks
After the debacle of two American banks, smaller banks are likely to tighten their lending standard to deal with regulators, which is expected to impact demand for real estate that is still recovering from the impact of the pandemic.
While bigger banks have been shown to benefit from the liquidity issues at smaller banks, for example, deposits in top banks such as Morgan Stanley, Citibank and Wells Fargo have increased after the collapse of SVB. However, given the current market conditions, big American banks are also likely to get stressed assets at discounted valuations, possibly giving them better returns in the long term.
Several economists have modestly lowered their forecasts for economic growth for the United States economy this year because of the American Bank crisis as smaller banks draw back lending in an already weak environment.
Goldman Sachs stated it had cut its estimate of the increase in gross domestic product this year by three-tenths of a percentage point to 1.2%. Goldman is among the minority of economists not predicting a recession in 2023.
China’s Economy And Banks
China, the world’s second-largest economy, is also bound to feel the impact of the banking crisis. Experts suggest the instantaneous effects of the banking crisis could be felt most by China’s growing tech sector.
Given the reverberations due to the collapse of three central banks, Chinese tech companies that primarily rely on investments from foreign investors may face a funding crunch.
However, in the same vein, it could benefit China also as some tech companies may be attracted to shift their operations to China, which provides a similar development infrastructure as Silicon Valley but at the same time boasts of a lower cost of acquiring talent.
India’s Economy And Banks
Being in India, one may perhaps wonder if the collapse of these banks might have any impact here.
In actuality, the deposits in banks may not be impacted directly; however, any market-linked investments could face severe volatility until the current crisis settles.
Secondly, the rupee also has the potential to weaken as FII may opt to dump banking stocks to trim their exposure to the sector.
However, it is the Indian startup ecosystem that could suffer the most owing to the double whammy of a funding winter and liquidity issues arising due to the collapse of SVB.
Switzerland’s Economy And The Banking Crises
Focusing on Switzerland, which is the European financial hub for banking, its reputation in this sector has taken a severe hit due to the crisis at Credit Suisse.
Let us consider the severity of the crisis – the combined assets of UBS and credit switch is 1.4 times the GDP of Switzerland.
The country’s economy relies heavily on providing a safe haven banking system, which now stands threatened after Credit Suisse’s (the second largest bank after UBS) fallout.
It also suggests that the GDP growth in Switzerland could be downgraded soon. The country’s central bank is also considering using public money to bail out its second-largest lender, meaning public funds could face stress in the short term.
Conclusion: A banking threat or a collapse of a bank, irrespective of which corner of the world one may be or in which country, has a direct consequence on not only the depositors (people) but also the economy of that country.
Moreover, as more and more economies depend on each other and as the number of global investors rises, the threat of a banking crisis becomes more real.