Credit Suisse crisis: How AT1 wipeout could impact the global bond market

Source: The post is based on the article “Credit Suisse crisis: How AT1 wipeout could impact the global bond market” published in Indian Express on 22nd March 2023

What is the News?

Swiss regulator FINMA wrote down $17 billion of additional tier one, or AT1, Contingent Convertible (CoCo) bonds of Credit Suisse as UBS agreed to buy Credit Suisse to protect the financial system.  

What are AT1 Bonds?

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How is the US Silicon Valley bank crisis different from the Credit Suisse crisis?

The Credit Suisse crisis happened due to: 1) bond market losses, 2) poor governance record and 3) good and bad investment decision-making which saw the bank suffering from scandal to scandal over much of the last decade and it was repeatedly categorized as Europe’s weakest “systemically important” bank.

In the US, the triggers were different. Over 90% 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.

What will be the impact of the global banking crisis on India’s banking sector?

Foreign banks 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. Credit Suisse is not being seen as a direct threat in India as it owns just 0.1% of assets in the Indian banking system. It is the 12th largest foreign bank in India, owning assets worth Rs 20,700 crore. 

However, unlike SVB, Credit Suisse is a much larger global financial entity. If it remains in trouble for a long time or fails, the impact will be felt across world financial markets and the global economy. 

The impact will be seen on Indian financial markets and the economy too. But the impact may be muted as India’s financial markets are not as interlinked with global financial markets as those of some other countries.