{"id":10913,"date":"2022-11-09T17:35:06","date_gmt":"2022-11-09T12:05:06","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=10913"},"modified":"2022-11-09T17:42:52","modified_gmt":"2022-11-09T12:12:52","slug":"credit-suisse-crisis-and-impact-on-india-stock-market","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/credit-suisse-crisis-and-impact-on-india-stock-market\/","title":{"rendered":"Credit Suisse Crisis and Impact on India Stock Market"},"content":{"rendered":"\n<p>In the past few weeks, you may have heard about how Credit Suisse, an influential bank, is in crisis. The bank\u2019s stock has fallen by more than 60% in the last 1 yr. The bank&#8217;s shares have been hammered constantly, and investors have been buying Credit Default Swaps (CDS) of the Credit Suisse loans. So, the share prices have been seeing new lows, and the CDS has been seeing new heights.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh3.googleusercontent.com\/SA1yksp3UKQVCgq0Sclrpg9JKiKJDHKPjfGtpT2ivkGB3Slipbg8WYAiyRWI-MVwp8wUDslSR8UQryCIeCC25OsB4N4ASgbeEtLQkXFritfsI6-o-eGKCiQLs-PFOZ5h9xQAIicTGSmxXmWMKfTCfLYMx-HO92ZTZ-Mh9DYeued3JTfMbcwukfzr9UfN5w\" alt=\"\"\/><\/figure>\n\n\n\n<p>Source &#8211; Investing.com<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/credit-suisse-crisis-and-impact-on-india-stock-market\/#What-went-wrong-at-Credit-Suisse\" title=\"What went wrong at Credit Suisse?\">What went wrong at Credit Suisse?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/credit-suisse-crisis-and-impact-on-india-stock-market\/#Mortgage-Backed-Securities-and-Credit-Swaps\" title=\"Mortgage-Backed Securities and Credit Swaps\">Mortgage-Backed Securities and Credit Swaps<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/credit-suisse-crisis-and-impact-on-india-stock-market\/#CDS-wasnt-the-only-trigger-for-the-Credit-Suisse-crisis\" title=\"CDS wasn\u2019t the only trigger for the Credit Suisse crisis\">CDS wasn\u2019t the only trigger for the Credit Suisse crisis<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/credit-suisse-crisis-and-impact-on-india-stock-market\/#Is-the-Credit-Suisse-crisis-the-same-as-the-2008-financial-crisis\" title=\"Is the Credit Suisse crisis the same as the 2008 financial crisis?\">Is the Credit Suisse crisis the same as the 2008 financial crisis?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/credit-suisse-crisis-and-impact-on-india-stock-market\/#Will-the-Credit-Suisse-crisis-impact-India\" title=\"Will the Credit Suisse crisis impact India?\">Will the Credit Suisse crisis impact India?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/credit-suisse-crisis-and-impact-on-india-stock-market\/#Sources\" title=\"Sources\">Sources<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What-went-wrong-at-Credit-Suisse\"><\/span>What went wrong at<strong> Credit Suisse?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>To understand this, we need to understand the 2008 Lehman Brothers crisis or the better-known 2008 Housing crisis. 2008 was the time when American banks failed badly due to high bad debts.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Mortgage-Backed-Securities-and-Credit-Swaps\"><\/span><strong>Mortgage-Backed Securities and Credit Swaps<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>How did the banks end up in so much debt? The reason was the Mortgage-Backed Securities and Credit Default Swaps. Now let us understand CDS with an example.<\/p>\n\n\n\n<p>10 home buyers want a loan of Rs. 1 cr. each. The bank lends them the money to buy houses. But the bank does not lend its own funds, it borrows from an institution or an investor. The investor gives the bank Rs. 10 cr., which it then lends to borrowers at 12% interest. The bank pays the investor about 8% interest and retains the remaining 4%, which becomes its profit. This is mortgage-backed security where a bank gives out a group of loans and sells it to another party. Investors of mortgage-backed securities get returns, and banks get profits.<\/p>\n\n\n\n<p>Investors are assured that the bank lends to credible borrowers. The bank is happy with profits, and borrowers are happy with their houses. It seems like a win-win situation. But as more and more <a href=\"https:\/\/www.tickertape.in\/blog\/loan-eligibility-calculator\/\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/blog\/loan-eligibility-calculator\/\">loans <\/a>were being demanded, the banks worried about people not paying their mortgages on time. So they went to institutions that would insure their mortgage-backed securities at a premium charge. That way, even if the borrowers failed to repay loans, the institutions that insured these mortgage-backed securities would pay back the loans.<\/p>\n\n\n\n<p>The problem was the institution was very sure that no one would default on their mortgages so they insured these mortgage-backed securities with institutions like Lehman Brothers and Morgan Stanley at a very cheap premium. Given the low premium, banks started carelessly lending money and insuring their mortgage-backed securities. Once prices and rents of houses started going down, people started defaulting.<\/p>\n\n\n\n<p>Now, the premiums collected by institutions like Lehman Brothers were not enough to repay the loans. So they started going bankrupt. According to a case study in Investopedia, Lehman Brothers underwrote mortgages of about $85 bn, four times its shareholder&#8217;s <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">equity<\/a>. As these insurers went bankrupt, they couldn\u2019t cover the bad loans. As a result, banks also went bankrupt, and so did investors. Thus, the domino effect started.<\/p>\n\n\n\n<p>In the present day, people started going back in history and comparing the Credit Suisse crisis to the 2008 global financial crisis because the main reason for both crises was the Credit Default Swaps. According to some sources, the premium on Credit Suisse CDS increased even higher than in 2008 recently.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"CDS-wasnt-the-only-trigger-for-the-Credit-Suisse-crisis\"><\/span><strong>CDS wasn\u2019t the only trigger for the Credit Suisse crisis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>If you think CDS was the only problem, that\u2019s not right\u2014aggressive lending was another issue. Credit Suisse took two wild bets. It made clients lend money to Greensill Capital, a financial services company involved in supply chain financing. Greensill and its subsidiary Greensill Bank had major exposure in the GFG alliance of Sanjeev Gupta. He is the executive chairman of the GFG alliance, which has a range of global businesses run by his family the major businesses are steel and Mining. According to a report from Reuters Greensill defaulted on loans of $140 mn from Credit Suisse.<\/p>\n\n\n\n<p>Second, a family office named Archegos Capital decided to finance their trades of risky stocks with Credit Suisse. When these trades went into losses, the fund collapsed and defaulted on the <a href=\"https:\/\/www.tickertape.in\/blog\/margin-requirements\/\">margin<\/a> calls. The amount was about $5.5 bn. Apart from Credit Suisse, Morgan Stanley and Nomura were also impacted. To make up for it, the banks started selling shares of media and entertainment companies Archegos had invested in.<\/p>\n\n\n\n<p>According to a press release, Credit Suisse also had to settle legacy disputes summing up to $275 mn with regulators of the USA, UK, and Switzerland.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Is-the-Credit-Suisse-crisis-the-same-as-the-2008-financial-crisis\"><\/span><strong>Is the Credit Suisse crisis the same as the 2008 financial crisis?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Credit Suisse is the only bank struck by the crisis. There is a high probability that government would intervene as this bank is too big to fail. If Credit Suisse goes bankrupt, it will have a domino effect on many dependent organizations, pushing them into bankruptcy. To prevent this, Credit Suisse is considering selling profitable businesses to get out of this tough situation.<\/p>\n\n\n\n<p>In my opinion, comparing the two events may not be exactly right because, in 2008, every major financial institution had exposure to mortgage-backed securities and institutions that insured or underwrote these went bankrupt. To end this, the government had to intervene and bail out these institutions to retain people\u2019s trust in these banks.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Will-the-Credit-Suisse-crisis-impact-India\"><\/span><strong>Will the Credit Suisse crisis impact India?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Even if the bank goes bankrupt (which doesn\u2019t seem possible as the government would intervene), the impact on the Indian economy would be temporary as it is a very small part of the Indian banking system. In contrast, there were many financial institutions involved in the GFC contagion in 2008, but this time, it is just Credit Suisse.<\/p>\n\n\n\n<p>It may come to you as a surprise, and a pleasant one, that Credit Suisse\u2019s Indian entity is in a comfortable position.<\/p>\n\n\n\n<p>Still, experts believe that the Indian market might see an impact on flows and <a href=\"https:\/\/www.tickertape.in\/market-mood-index?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=drurat\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/market-mood-index?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=drurat\" rel=\"noreferrer noopener\">sentiment<\/a>, which can cause <a href=\"https:\/\/www.tickertape.in\/blog\/volatility\/\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/blog\/volatility\/\">volatility.<\/a><\/p>\n\n\n\n<p>Only time will tell to what extent the government will intervene to bail out Credit Suisse and get it out of this mess.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Sources\"><\/span>Sources<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Press Release &#8211; <a href=\"https:\/\/www.credit-suisse.com\/about-us-news\/en\/articles\/media-releases\/finma-mozambique-observation-202110.html\" rel=\"nofollow noopener\" target=\"_blank\">https:\/\/www.credit-suisse.com\/about-us-news\/en\/articles\/media-releases\/finma-mozambique-observation-202110.html<\/a><\/p>\n\n\n\n<p>Reuters report of Greensill Default &#8211; <a href=\"https:\/\/www.reuters.com\/business\/finance\/credit-suisse-appoints-receivers-recover-140-mln-greensill-loan-2021-03-10\/\" rel=\"nofollow noopener\" target=\"_blank\">https:\/\/www.reuters.com\/business\/finance\/credit-suisse-appoints-receivers-recover-140-mln-greensill-loan-2021-03-10\/<\/a><\/p>\n\n\n\n<p>Investopedia Case study &#8211; <a href=\"https:\/\/www.investopedia.com\/articles\/economics\/09\/lehman-brothers-collapse.asp\" rel=\"nofollow noopener\" target=\"_blank\">https:\/\/www.investopedia.com\/articles\/economics\/09\/lehman-brothers-collapse.asp<\/a><br>Stock Prices data &#8211; <a href=\"https:\/\/in.investing.com\/equities\/credit-suisse\" rel=\"nofollow noopener\" target=\"_blank\">https:\/\/in.investing.com\/equities\/credit-suisse<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Credit Suisse crisis is being compared to the 2008 global financial crisis. Is the situation as serious as it seems? If yes, how will it impact India?<\/p>\n","protected":false},"author":111,"featured_media":10916,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[1744],"tags":[],"acf":[],"modified_by":"Anshiya Tabassum","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2022\/11\/7-Nov-22-Credit-Suisse-crisis-and-impact-on-India-Stock-Market-Guest-article_-.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10913"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/111"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=10913"}],"version-history":[{"count":8,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10913\/revisions"}],"predecessor-version":[{"id":10926,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/10913\/revisions\/10926"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/10916"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=10913"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=10913"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=10913"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}