If tomorrow news comes that the State Bank of India is going to acquire HDFC Bank, you will be shocked, why?
And it should be, after all, we are talking about the two biggest banks in our country here.
Something similar is happening in Switzerland.
The Swiss economy is considered one of the most stable economies in the world.
This country is not only known for its beautiful landscapes and chocolates,
but it is also known for its solid banking system, strong legal and political environment and strong currency.
Industrialists and high net worth individuals from all over the world consider Switzerland as a safe haven to keep their money.
But today Switzerland and its banks are in discussion due to some other reasons.
Switzerland's largest bank UBS is about to buy Credit Suisse, its second largest bank, for $3.25 billion.
If you are surprised by this news, then stop.
The deal is happening at a 60% discount to Credit Suisse's Friday closing share price, which was at a much-discounted price from its all-time high.
The issue is so big that even India's billionaire banker Uday Kotak has expressed concern.
Following the deal, all shareholders of Credit Suisse will receive 1 UBS share for every 22.48 shares held!
Well, one more thing. Did you read the AT1 bond story of Yes Bank?
Those investors whose lock-in in the shares of Yes Bank is over now will understand this very well.
How RBI had asked to permanently write off AT1 bonds of Yes Bank!
Similarly, the acquisition of Credit Suisse by UBS has announced its decision to write off Tier 1 debt worth $17.24 billion to Swiss regulators.
If you are getting confused, then wait.
In this video, we will understand this case in detail, everything from history to the latest updates.
So let's first understand a little background.
After the 2008 global financial crisis, political and financial leaders acted in unison, introducing various norms and rules.
All these steps are being taken so that the global economy does not face such a big crisis again.
But.. The year is 2023, and we are in a phase where one bank after another is collapsing.
2 US banks have already closed, and a 3rd bank was about to collapse when 11 US banks put together a $30 billion rescue package and saved it.
The collapse of Silicon Valley Bank and Signature Bank raised questions about the stability of banks and financial institutions around the world.
Even the smallest weakness in the balance sheet of banking institutions is now being viewed not through a magnifying glass but by telescope.
And the range of this telescope goes not only to the US bank, but also to European and even Indian banks.
In such a situation, experts say that perhaps the next alarm bell can be heard from Credit Suisse Bank.
And so it happened, one development after another over the past week, and the Credit Suisse crisis unfolded.
By the way, the people on Twitter are roasting Credit Suisse a lot regarding this Crisis.
When the private banking arm of Credit Suisse stopped accepting bonds of Adani Group companies after Hindenburg's "US" report.
That's why Twitterati is calling this unfortunate detour of Credit Suisse "karma".
Anyhow coming to the point. Friends, Credit Suisse's problems are not 1-2 weeks old.
In October last year too, we covered the critical situation at Credit Suisse and Deutsche Bank in detail.
But before I tell you what have been the past and recent issues of Credit Suisse,
it is very important for us to know why the collapse of Credit Suisse could have been harmful to the global economy.
Credit Suisse is a global investment banking and financial services firm and one of the largest banks in Switzerland.
Globally, it is one of 30 banks that are considered a "Systemically Important Financial Institution (SIFI)"
by the "Financial Stability Board", an international body that monitors the global financial system.
Systemically important financial institutions like banks, insurance companies, or financial institutions whose failure could trigger a financial crisis.
Therefore it becomes very critical to protect these banks from failure or at least limit its effect in case of failure.
That is why such institutions are also considered "too big to fail".
Yes, it is another matter that Bear Stearns and Lehman Brothers also used to come in the categories of "too big to fail".
Anyway, you got the point, didn't you?
if banking giants collapse, the whole world economy will be affected.
So the Swiss government understood the criticality of the issue, acted, and got the Credit Suisse takeover by UBS completed.
So let's now understand the problem of Credit Suisse in detail.
Credit Suisse's problems have been many years in the making.
The bank has posted a net loss of 7.3 billion Swiss francs in 2022, with a huge 1.4 billion Swiss franc loss in Q4.
Credit Suisse is in the midst of a multi-year transformation program and it says 2023 will be tough for it as well.
After the October 2022 crisis, the bank was under pressure from investors.
Due to this pressure, they decided that he would simplify and restructure his business in order to further increase its profitability.
And under this strategy, the bank raised capital of $ 4.2 billion in November 2022.
Following this Fundraise, the Saudi National Bank became the largest shareholder in Credit Suisse with a 9.9% stake.
But the bank's liquidity crisis was not improving.
The confidence of investors and public in the bank has reduced so much that the banks' outflows are increasing, and deposits are decreasing.
The bank's net outflows hit CHF 110.5 billion in the fourth quarter itself.
For reference if you have an outflow of 123 billion Swiss francs to Credit Suisse in Bateau's 2022!
Whereas in 2021, a net inflow of 30.9 billion was recorded.
Due to these reasons, the stock of Credit Suisse has fallen by more than 75% in the last one year.
Now if you are wondering why investor confidence has waned across Credit Suisse,
let me tell you that the bank has been in news for all the wrong reasons in the last few years.
For example, let's talk about these 5 issues only.
The bank is currently facing criminal conviction in a money laundering case in Bulgaria.
Allegedly, he was involved in money laundering for drug dealers.
Second, the bank is also embroiled in a corruption case in Mozambique.
Third - this was also mentioned in our previous video on Credit Suisse - the bank was also involved in a scandal of spying on its executives.
Fourth, in the same video we also told you about Credit Suisse's dealings with infamous financier Archigos Capital.
And lastly, the bank is also embroiled in the data leak controversy.
All these issues are already there, just happened that 2 banks in the US got drowned, set the dominoes in motion.
And globally, the financial health of banks came under tighter scrutiny.
Only a few days after these events, i.e. 6-7 days ago, Credit Suisse admitted to 'material weaknesses' in their financial reporting.
That is, there were some shortcomings in the financial reporting of the bank.
Think, if a bank, that too of this stature, itself says that there were deficiencies in our reporting, then what will be the reaction of the market?
What would have happened?
An investor protection lawsuit was filed against Credit Suisse alleging that it made materially false and misleading statements in its 2021 annual report.
In the US, a group of investors can file an investor protection or securities fraud class action lawsuit against the Company
whenever investors suffer financial loss for stock manipulation or violation of their state laws.
And just a day or two before this, it was reported that Saudi National Bank, the largest investor in Credit Suisse,
has closed the door on further investment in Credit Suisse citing regulatory issues
The bank's liquidity concerns were well known
The CEO of Credit Suisse had to come out to assure the bank's financial soundness after the Saudi National Bank declined further investment.
And at this point, Credit Suisse's troubles have turned into a full-blown crisis!
Shares of Credit Suisse crashed 31% on Wednesday to hit their all-time lows, prompting trading to be halted.
Even European markets closed in deep red.
The European index declined by 3% and the banking sector index there was also down 7.1%.
The stock price of Credit Suisse has fallen by 26.10% in the last 1 week and by 32.85% in the last 1 month.
Not only shares, but their bond prices also started falling rapidly.
On hearing this news, banks and investors started buying Credit Suisse's credit default swaps.
Such was the intensity of the buying that bank default swaps climbed to their highest levels.
In simple terms, a credit default swap is a type of insurance that protects a party against payment default by its borrowers.
You should understand that the credit default swap is like an insurance for the lenders so that they do not suffer huge losses in case of default.
And the party who buys the protection has to use regular premiums or pay costs like insurance.
And when CDS premiums start rising, it is believed that market participants are betting on US company defaults,
which means that the chances of our company defaulting are increasing.
And its spillover effect happened in the rest of the markets as well, especially in the stocks of global banks.
Of course, how can the Indian market remain untouched by the inn development?
The Nifty 50 corrected 4.4% in 5 straight trading sessions on the back of SVB's fall.
And especially talking about the Bank Nifty index, this index has been in a free fall since March 8, 2023, when the news of SVB came.
Aware of Credit Suisse's problems, US-based and the rest of the European banks are taking steps to reduce their exposure to the Swiss lender.
And following last week's development, France's biggest bank BNP Paribas went a step further and informed its customers
that it would not step into derivatives contracts in which Credit Suisse is a counterparty.
Amidst so many problems, every hour was bringing negative news for Credit Suisse.
And it was put in place by Credit Suisse and the Swiss authorities to prevent a possible global financial crisis from happening.
Credit Suisse borrowed $54 billion (50 billion Swiss francs) from the Swiss National Bank to maintain sufficient assets and close the asset-liability mismatch.
They needed to maintain sufficient capital to be protected even from the scenario of a bank run from above.
Bank run situation is called when all or most of its customers try to withdraw their deposits at once due to fear of failure of a bank.
Subsequently, Credit Suisse said it would repurchase 3 billion Swiss francs worth of its debt.
Now don't get confused by hearing bond buyback. Simple enough. Bond buyback simply means to pay off your loan early.
Meaning the borrower himself repays his loan from the lender, perhaps at a slight discount.
That is, in a way, repaying your bond with the help of additional cash is called a bond buyback.
But are all these moves enough to save such a big bank? no way.
And that's why JP Morgan, after Wednesday's massive stock correction, suggested that
Credit Suisse should be forced to merge with a stronger lender such as UBS Bank, which is also the country's largest bank with them.
UBS is not only Switzerland's largest bank but it is also considered one of the world's leading financial institutions.
By the way, let us tell you that initially UBS Group strongly rejected this proposal.
So of course UBS is under pressure from the Swiss authorities to quell this whole turmoil.
In fact, the Swiss government was even willing to guarantee against the risk involved in the deal.
Finally the latest development this morning is that the Swiss government has successfully got the deal done between UBS and Credit Suisse.
If reports are to be believed, UBS will complete the acquisition of Credit Suisse for $3.25 billion.
The Swiss government is providing assistance and credit support of 100 billion francs for this deal.
The UBS official said that he may sell off some parts of Credit Suisse in the coming months and wants to reduce the size of the bank.
However, the sentiments of the investors in the market of this deal have not calmed down.
European markets open today UBS shares fell by 14% and Credit Suisse stock fell by 63%.
Now obviously, the question must be coming to your mind what will happen to the Indian markets now, right?
Well, it is a matter of relief that Indian financial institutions have much less exposure to Credit Suisse.
Credit Suisse currently has only 0.1% of India's total banking system assets in operation.
And for this, he does not see a direct threat to India.
RBI is also closely following the developments from Credit Suisse as well as verifying the liquidity adequacy of Indian banks.
In fact, RBI is closely analyzing the business models and balance sheets of Indian banks, so that banks can be warned in advance.
Nilesh Shah, a mutual fund industry veteran and CEO of Kotak Mahindra Mutual Fund, believes that due to India's strong regulatory and liquidity norms,
it is impossible for situations like SVB or Credit Suisse to get paid.
But, the global economy is closely interconnected and the Indian market cannot remain completely insulated.
If this banking crisis going on in America and Europe takes any other turn, then the fear of recession will start increasing.
In such a situation, there can be a significant impact on Indian IT businesses
because, on the one hand, America and Europe are the biggest export markets for Indian IT companies.
Secondly, the banking and financial services sector accounts for a major portion of the revenue books of Indian IT companies.
That is, foreign banks and financial services companies are major customers of Indian IT companies.
Also, analysts at JP Morgan believe that among Indian tech companies, TCS and Infosys have the largest exposure to troubled US regional banks.
By the way, moving away from India and once again looking at America, some positive news is coming from there too.
Interestingly, the Oracle of Omaha - Warren Buffett has also entered the fray.
Berkshire Hathaway CEO Warren Buffett is reportedly in touch with US President Joe Biden's administration after the fall of the US.
Many people probably won't know,
but Buffett played a key role in strengthening his liquidity position by investing $5 billion in Goldman Sachs during the 2008 financial crisis
and $5 billion in Bank of America in 2011 as well.
Also, the government was advised that injecting capital into the bank by buying assets would be a better option for the economy.
With this, let's end today's video.
Friends, when you suddenly increase the 15-year "near zero" interest rates, something will break.
And the events of the last 2 weeks show this reality somewhere.
Of course, how much the global banking industry and regulators have learned from the 2008 financial crisis is being questioned today.
Why not? Whenever there is a financial threat or crisis, the ambulance of the central banks gets them on time. Not sure?
Well, the Federal Reserve Bank of America has taxed the dollar printing machine. Yes. Liquidity is back!
In the past week, the US Central Bank has printed $300 billion to bail out the banks.
And with this, their fight against inflation has weakened further.
But despite this, it is being said that the Fed will continue its tight policy with a rate hike of 25 bps in its next meeting.
"Is America's Financial System a Casino Economy?"
Let's end this video with this question.
We would also like to inform you that we post similar educational and investment-related videos in Gujarati and Marathi as well.
So if you like to watch videos in any language, then you must also subscribe to our channel.
We have put the links to the channels in the description.
Subscribe to the Groww channel for more such interesting videos related to Stock Market, Economy, and Business. Bye!