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Credit Suisse Crisis

Recently UBS bank agreed to buy Credit Suisse bank that involved in fraud and forgery and collapsed eventually.

What is Credit Suisse?
  • Credit Suisse is a famous investment bank headquartered in Switzerland.
  • It’s been around since 1856.
  • Swiss central bank has designated it one of the country’s global systemically important banks (G-Sib).
  • Credit Suisse is the 12th largest foreign bank in India and it owns assets worth Rs 20,000 crore.

Global systemically important banks (G-Sib) is a bank whose systemic risk profile is deemed to be of such importance that the bank’s failure would trigger a wider financial crisis and threaten the global economy.

What led to the Credit Suisse crisis?

Causes

  • Fallen share price -Since the beginning of 2022, Credit Suisse’s share price has fallen close to 60%
  • Credit default swaps (CDS) -The spreads on credit default swaps (CDS) on Credit Suisse debt have spiked to a 14-year high — the highest since the global financial crisis of 2008.
  • Risky bets -Credit Suisse has made several risky bets and ended up losing a lot of investor money.
  • Fading investor’s confidence –the falling share price eroded investor confidence, and has made raising fresh capital costlier.

Credit Default Swaps (CDS) is an insurance instrument. If an investor who has lent money to a firm (say Credit Suisse) is unsure about the firm’s ability to repay, the investor can buy a CDS on Credit Suisse’s bond.

Issues

The biggest loser in the crisis are AT1 bond holders.

What is Additional Tier 1 (AT1) bonds?

  • AT1 bonds are also known as “contingent convertibles,” or “CoCos”.
  • They are a type of unsecured, perpetual bonds that banks issue to improve their core capital base.
  • It was introduced in the aftermath of the 2008 global financial crisis.
  • AT1 are a risky bet — if a lender gets into trouble, AT1 bonds can be quickly converted into equity or written down completely.
  • They have higher risk and AT1s offer a higher yield than most other bonds.
  • They are long-term and do not carry any maturity date.
  • AT1 bonds are mandatory under Basel III norms.


What are the impacts on India?

  • The crisis may have some impact on the Indian information Technology Industry, markets and startups.
  • The startups receiving funds from Silicon valley bank may face funding issues.
  • India has implemented Basel-III norms for the banking system.
  • Under this system, banks have to maintain liquidity coverage ratio, which was actually missing from the SVB case and to some extends even in the case of Credit Suisse
  • AT1 may contribute to a higher cost of capital for banks, including Indian lenders

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.

What are the differences between European and US crisis?


European crisis

  • European crisis is credit Suisse crisis
  • Triggering factor -Credit Suisse was partly a victim of bond market losses, but multiple other factors were at play in its downfall
  • A poor governance record and chequered investment decision-making, which saw the bank lurching from scandal to scandal over much of the last decade.

US crisis

  • US crisis include Silicon Valley Bank (SVB) and Signature Bank crisis
  • Triggering factor -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


What are the measures taken to resolve the crisis?

The Swiss government and regulators in a bid to contain the global financial market panic brokered the deal between UBS and credit Suisse.


Safety of Indian Banks

The failure of Silicon Valley Bank and Signature Bank in the US raises questions on the safety of depositors' wealth in India.

What is the background of the issue?
Safe haven – India remained a safe haven during the global financial crisis triggered by the collapse of investment bank Lehman Brothers in 2008.
Sound domestic banks – This is because of the domestic banks, backed by sound regulatory practices, showing strength and resilience.
Unaffected – Indian banks remained unaffected by the failure of Silicon Valley Bank (SVB) and Signature Bank, despite the global interconnectedness in the financial sector.
What is the basis for the confidence in the resilience of Indian banks?
Balance sheet – A reason why an SVB-like failure is unlikely in India is that domestic banks have a different balance sheet structure.
No large withdrawals – In India we don’t have a system where deposits are withdrawn in such bulk quantities.
Household savings – It constitute a major part of bank deposits in India, this is different from the US, where a large portion of bank deposits are from corporates.
Public sector banks – A large chunk of Indian deposits is with public sector banks, and the rest is with very strong private sector lenders.
Importance to depositor’s money – In India, the approach of the regulator has generally been that depositors’ money should be protected at any cost.
The best example is the rescue of Yes Bank where a lot of liquidity support was provided.
Which banks are classified as D-SIBs?
D-SIBs – RBI has classified SBI, ICICI Bank, and HDFC Bank as Domestic Systemically Important Banks (D-SIBs).
It means that these banks have to earmark additional capital and provisions to safeguard their operations.
CET1 – The additional Common Equity Tier 1 (CET1) requirement for D-SIBs was phased-in from 2016, and became fully effective from 2019.

The Basel III accord introduced a regulation that requires commercial banks to maintain a minimum capital ratio of 8%, 6% of which must be Common Equity Tier 1.

Capital conservation buffer – The additional CET1 requirement was in addition to the capital conservation buffer.
The Basel, Switzerland-based Financial Stability Board (FSB), an initiative of G20 nations, has identified, in consultation with the Basel Committee on Banking Supervision (BCBS) and Swiss national authorities, a list of global systemically important banks (G-SIBs).

G-SIBs – There are 30 G-SIBs currently, including JP Morgan, Citibank, HSBC, Bank of America, Bank of China, Barclays, BNP Paribas, Deutsche Bank, and Goldman Sachs.
No Indian bank is on the list.

How does RBI select D-SIBs?
The RBI follows a 2 step process to assess the systemic importance of banks.
Sample set
Size of GDP – Banks are selected for computation of systemic importance based on an analysis of their size as a percentage of GDP. Banks having a size beyond 2% of GDP will be selected in the sample.
D-SIBs – Banks that have a systemic importance above a certain threshold are designated as D-SIBs.

Segregation

Buckets – D-SIBs are segregated into buckets based on their systemic importance scores.
Capital Charge – A D-SIB in the lower bucket will attract a lower capital charge, and a D-SIB in the higher bucket will attract a higher capital charge.

National Security Act

Controversial Sikh preacher and secessionist Amritpal Singh and his associates have been charged by Punjab Police under the National Security Act, 1980.

About National Security Act -

  • The NSA empowers the Centre or a State government to detain a person to prevent him from acting in any manner prejudicial to national security.
  • It is an administrative order passed either by the Divisional Commissioner or the District Magistrate — and not detention ordered by police based on specific allegations or for a specific violation of the law.
  • The government can also detain a person to prevent him from disrupting public order or for maintenance of supplies and services essential to the community.
  • The maximum period for which one may be detained is 12 months. But the term can be extended if the government finds fresh evidence.
What happens when NSA is imposed?

  • In the normal course, if a person is arrested, he or she is guaranteed certain basic rights. These include the right to be informed of the reason for the arrest.
  • Section 50 of the Criminal Procedure Code (Cr.PC) mandates that the person arrested has to be informed of the grounds of arrest, and the right to bail. Sections 56 and 76 of the Cr.
  • PC also provides that a person has to be produced before a court within 24 hours of arrest.
  • Additionally, Article 22(1) of the Constitution says an arrested person cannot be denied the right to consult, and to be defended by, a legal practitioner of his choice. But none of these rights are available to a person detained under the NSA.
  • A person could be kept in the dark about the reasons for his arrest for up to five days, and in exceptional circumstances not later than 10 days. Even when providing the grounds for arrest, the government can withhold information which it considers to be against public interest to disclose.
  • One crucial procedural safeguard under the NSA is granted under Article 22(5), where all the detained persons have the right to make an effective representation before an independent advisory board, which consists of three members; and the board is chaired by a member who is, or has been, a judge of a High Court.
  • The arrested person is also not entitled to the aid of any legal practitioner in any matter connected with the proceedings before an advisory board, which is constituted by the government for dealing with NSA cases.

Powers of District Magistrates -

  • Even if a person is in police custody, the DM can slap NSA against him. Or, if a person has been granted bail by a trial court, he can be immediately detained under the NSA. If the person has been acquitted by the court, the same person can be detained under the NSA.
  • Also, the DM who passed the detention order is protected under the Act: no prosecution or any legal proceeding can be initiated against the official who carried out the orders.

World Happiness Report 2023

India was placed at the 126th position out of 137 countries in the World Happiness Report released by the United Nations Sustainable Development Solutions Network.
  • India was ranked even below Pakistan, Nepal, China, Bangladesh, and Sri Lanka. In Asia, India is only better off than Afghanistan which was placed at 137th position.
  • War-struck Ukraine also figured above India at 92 and Russia was positioned at 72.
  • According to the World Happiness Report, Finland is the happiest country in the world. It is the sixth consecutive win for Finland.
About the ‘World Happiness Report’ -

  • The ranking is done on a three-year average based on surveys of !Life Evaluation" conducted by Gallup World Poll which surveys around 1000 people from each country to evaluate their current life on a scale of 0-10.
  • On this scale, 10 marks the best possible and 0 as the worst possible life. Further, six key variables GDP per capita, social support, healthy life expectancy, freedom, generosity, and corruption contribute to explaining life evaluations.
  • This year marks the eleventh anniversary of the World Happiness Report.
  • The report's measurement of subjective well-being continues to rely on three main well-being indicators: life evaluations, positive emotions, and negative emotions (described in the report as positive and negative affect).
About SDSN -

  • It was launched in 2012 by UN Secretary-General Ban Ki-moon to mobilise global scientific and technological expertise to promote practical problem solving for sustainable development and implement the Sustainable Development Goals (SDGs). Following their adoption, SDSN is now committed to supporting the implementation of the SDGs at national and international levels.
  • SDSN aims to accelerate joint learning and help to overcome the separation of technical and policy work by promoting integrated approaches to the interconnected economic, social, and environmental challenges confronting the world.
  • SDSN works closely with United Nations agencies, multilateral financing institutions, the private sector, and civil society.
  • The organisation and governance of SDSN enables leaders from all regions to participate in the development of the network, while at the same time ensuring effective structures for decision making and accountability

Zealandia

Scientists have recently confirmed the existence of a "missing" continent known as Zealandia.

About Zealandia -
  • It is a long, narrow micro-continent that is mostly submerged in the South Pacific Ocean.
  • Zealandia or Te Riu-a-Māui in the Māori language was formally one of the constituent continents of the ancient supercontinent called Gondwana, which also included Western Antarctica and Eastern Australia over 500 million years ago. 
  • It began to "pull away" from Gondwana roughly 105 million years ago.
  • As Zealandia started pulling away, it began to sink beneath the waves, with over 94 percent remaining underwater for millennia.
  • It is approximately 1.89 million square miles (4.9 million square km) in size, about half the size of Australia.
  • The vast majority of this new continent lies beneath 6,560 feet (2km) of water.
  • The part of Zealandia which is above water forms the foundation of New Zealand's north and south islands as well as the island of New Caledonia. 
  • The existence of Zealandia was first recorded in 1642 by Dutch businessman and sailor Abel Tasman, who was on a mission to find the "great Southern Continent," or Terra Australis.