Global financial markets heaved a sigh of relief after the Swiss National Bank (SNB) came to the rescue of Credit Suisse with a $54-billion lifeline even as the European Central Bank pressed on with its plan to raise interest rates by half a per cent despite the turmoil in the banking sector.

The ECB’s decision indicates major central banks, including the Federal Reserve, might continue to prioritise inflation targetting even as they find ways to respond to recent signs of market distress that started with the collapse of two large US banks. Both the Fed and Bank of England are set to hold their policy meetings next week and India’s Reserve Bank of India will outline its policy in the first week of April. 

After days of heavy losses on investor fears over potential bank stresses across the world, decline in the European stock markets was halted as Credit Suisse received a bail out by Switzerland National Bank. The share price of Credit Suisse rose by over 30 per cent as the market opened on Thursday, after the bank said that it will borrow up to $54 billion from the Swiss National Bank.

On Wednesday, the share price of Credit Suisse had plunged to a fresh all-time low when top investor the Saudi National Bank said it would not pump in any more cash due to regulatory restrictions. The Swiss National Bank and the Swiss Financial Market Supervisory Authority said in a statement that Credit Suisse “meets the capital and liquidity requirements imposed on systemically important banks.”

While these developments may give investors some respite, the spectre of a financial crisis continues to hang over the markets.

Christine Lagarde, President of ECB, said “It’s not business as usual” even as she sought to instill confidence about the resilience of the European financial system.

India impact

Back in India troubles at Credit Suisee are unlikely to be disruptive for the Indian financial system.

Brokerage firm Jefferies said though relatively small in terms of size and scale of operations, with just over ₹20,000 crore in assets, Credit Suisse is more relevant to India’s financial system than Silicon Valley Bank (SVB), though it would not be disruptive.

SNB’s lifeline will address concerns about the international financial system following the collapse of two US banks – California-based Silicon Valley Bank and New York-based Signature Bank.

Also read: Credit Suisse is more relevant to India’s financial system than Silicon Valley Bank

Too big to bailout

Credit Suisse Group AG could be too big to bailout, warned economist Nouriel Roubini. “The problem is that Credit Suisse, by some standards, might be too big to fail, but also too big to be saved,” Roubini told Bloomberg.

Jefferies noted that given the relevance of Credit Suisse to India’s banking sector, there would be softer adjustments in assessment of counter-party risks, especially in the derivative market.

“We expect RBI to keep close watch on liquidity issues, counter-party exposures and intervene as necessary. This may also lead to institutional deposits moving more towards larger and quality banks,” the firm said.

Credit Suisse, which operates through a branch in Mumbai, has a significant presence in the derivatives market and has funded 60 per cent of its assets from borrowings of which the bulk is up to 2 months, the note said. Foreign banks are active in the Indian derivatives markets - forex and interest rates - where they have half the share.

In the traditional banking business, foreign banks have a minuscule presence in India, accounting for just about 6 per cent of total banking assets, 4 per cent of loans and 5 per cent of deposits.

About 70 per cent of Credit Suisse’s assets held in the form of government securities. Its off-balance sheet items are seven times of total assets. Its funding in India is largely short-term borrowings. Its deposit base is ₹2,800 crore.