Context: Over the past few days, the share price of Credit Suisse, one of the most influential banks in the world, has hit an all-time low.
What is Credit Suisse?
- Credit Suisse is a Swiss multinational investment bank and financial services company. It was founded in 1856 and is headquartered in Zurich, Switzerland.
- It provides various financial services such as investment banking, wealth management, and asset management.
- Credit Suisse is known as a “global systemically important bank,” a bank whose risk profile is deemed to be of such importance that its failure could trigger a wider financial crisis, so its potential collapse would be detrimental to the global economy.
- Credit Suisse has been facing various challenges in recent years, including the fallout from the 2008 financial crisis, regulatory issues, and declining profitability.
More on the News
- Shares of Credit Suisse plunged to all-time lows after the bank’s largest shareholder indicated it would not increase its holdings, fueling more turmoil in the global banking industry already shaken by the collapse of Silicon Valley Bank (SVB) and Signature Bank of US.
- SVB’s collapse is now the second-largest US bank failure on record after the 2008 collapse of Washington Mutual.
- New York-based Signature Bank also collapsed in the third-largest failure in the US.
- 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.
- American Depositary Receipts (ADRs) of Credit Suisse Group plunged up to 30% in early trading Wednesday before recovering some of their losses.
What are Credit Default Swaps (CDS)?
- Credit default swaps (CDS) are financial derivatives that allow investors to hedge or speculate on the creditworthiness of a borrower, typically a corporation or a government.
- A CDS works like an insurance contract, where the buyer pays a periodic fee (premium) to the seller in exchange for protection against the risk of default by the borrower.
- If the borrower defaults on its debt obligations, the seller of the CDS compensates the buyer for the losses incurred.
- CDS are often used to manage credit risk in bond portfolios or to bet on the likelihood of a default by a particular issuer.
What are American Depositary Receipts (ADRs)?
- American Depositary Receipts (ADRs) are a type of financial instrument that allows non-U.S. companies to list and trade their shares on U.S. stock exchanges.
- An ADR represents a specific number of a company’s shares and is issued by a U.S. bank that holds the actual shares of the foreign company in custody.
- ADRs are denominated in U.S. dollars and can be traded like any other U.S. stock, making it easier for American investors to invest in foreign companies without having to deal with foreign currency or international stock exchanges.
Related Information: Participatory Notes and Depository Receipts
- Participatory Notes are issued by registered Foreign Institutional Investors (FIIs) based outside India to their clients, enabling them to invest in Indian securities without being directly registered with the Securities and Exchange Board of India (SEBI).
- Depository Receipts (DRs), on the other hand, are certificates issued by a depository bank representing ownership of shares in a foreign company. DRs make it easier for investors to invest in foreign securities by providing a way to hold foreign shares without having to deal with the complexities of foreign markets.
- Differences between Participatory Notes and Depository Receipts:
|Feature||Participatory Notes (PNs)||Depository Receipts (DRs)|
|Issuer||Registered Foreign Institutional Investors (FIIs)||Depository Bank|
|Purpose||Enables clients to invest in Indian securities without being directly registered with SEBI||Provides a way to hold foreign shares without having to deal with the complexities of foreign markets|
|Trading||Privately negotiated between FII and clients, not traded on any exchange||Traded on stock exchanges, can be bought and sold by any investor|
|Transparency||Lack of transparency and potential for misuse due to anonymity and lack of disclosure requirements||Subject to more stringent regulations and disclosure requirements|
|Regulatory Requirements||Does not require clients to comply with SEBI’s registration requirements||Subject to compliance with regulations in both the issuer’s and the recipient’s jurisdiction|