Former RBI Governor Raghuram Rajan on Wednesday weighed on Swiss lender Credit Suisse's current situation where it is facing the fallout from the Silicon Valley Bank collapse.
"Credit Suisse’s problem is that it does not have a business. Over last few years, Credit Suisse has participated in almost every scandal that's come to light. There is a turnaround under way at Credit Suisse, but it needs investments," said Rajan in an interview with CNBC-TV18 referring to the string of scandals the bank faced in the last few months.
Credit Suisse was hard hit by the collapse of US investment firm Archegos in 2021 as well as the freezing of billions of supply chain finance funds linked to insolvent British financier Greensill.
The bank was also rocked by a prosecution in Switzerland involving laundering money for a criminal gang. Switzerland's second-biggest bank had seen fourth quarter customer outflows rise to more than 110 billion Swiss francs ($120 billion).
Rajan has an optimistic view about European banking system on a whole even as 20% drop in Credit Suisse shares led a 6% plus fall in the European banking index, while five-year credit default swaps (CDS) for the Swiss bank hit a new record high, highlighting increasing investor concerns.
"Other European banks don’t have the same problem as Credit Suisse. House prices may have stabilised but with supplies being low, people are not selling. Fed may not be too rattled if the market falls by another 10%," said Rajan, who is currently Katherine Dusak Miller Distinguished Service Professor of Finance at The University of Chicago Booth School of Business.
A pause in the Fed rate hike looks unlikely and a 25 bps hike still looks like a strong possibility as core inflation in US continues to be high, he said.
"I think in the US, at least for the moment there seems to be a sense that the Fed has pulled out all stocks. Depositors have been guaranteed right up to the largest depositors who typically are uninsured and and second, banks have access to liquidity by using the entire value of their bond portfolio. Remember, there are two reasons for concern in the US. One is a lot of small and medium banks are sitting on unrealised losses on their bond portfolios," he said.
"Many of them holding long term bonds, which have fallen in value with the Fed's rate hiking and the second is, many of them have a lot of uninsured depositors and the toxic combination of these two asset values having fallen and uninsured depositors getting very anxious is what led to Silicon Valley Bank's failure. And what is being attempted now is to reassure both sides, on the one side you can borrow against the full value of your assets and on the liability side, don't run, we've got you covered," he said.
"The CPI report that came out yesterday is not a comfortable one. Core inflation in the US is still going strongly, inflation has come down. But that was in a sense, the easy part, the supply chains rectifying and so on. The tough part now comes bringing it down to the 2-2.5 percent. So I think if the Fed sees that the financial sector stabilises, it may still go with a 25 basis point hike; I think 50 (basis point hike) is off the table."
Meanwhile, US stocks dropped on Wednesday as turbulence at Credit Suisse revived fears of a banking crisis, eclipsing bets of a smaller interest rate hike in March following weak economic data.
US-listed shares of Credit Suisse hit a recordlow, after its largest investor said it could not provide more financing to the bank, starting a rout in European lenders and bringing US banks under pressure as well.
US Treasury yields tumbled, with traders now expecting equal chances of a 25-basis-point rate hike and a pause at the Fed's March meeting.
At 11:57 am ET, the Dow Jones Industrial Average was down 585.89 points, or 1.82%, at 31,569.51, the S&P 500 was down 60.75 points, or 1.55%, at 3,858.54, and the Nasdaq Composite was down 100.00 points, or 0.88%, at 11,328.15.
With inputs from Reuters
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