Treasurers updating bank counterparty matrices should review the latest BIS report.
It’s time for corporate treasurers to rev up their counterparty risk analysis. The Bank for International Settlements (BIS) has just released its quarterly review detailing German and French bank exposures to troubled countries such as Greece, Spain, Ireland, and Portugal. It’s not pretty.
It also raises anew the issue of where to put the company’s cash, which was perhaps the biggest question treasurers faced from boards in the immediate wake of the Lehman collapse. Whether or not they are asking this question again, treasurers would be wise to reexamine their global bank exposures in response to the still-developing sovereign debt crisis in Europe described by the BIS. Preferably, this analysis will be done in-house, as ratings agencies still can come up short. As if to underscore this point, Moody’s today downgraded Greece four notches, which had some analysts observing that such a sizeable downgrade reflects the agency’s slowness to respond to problems.
With that in mind the BIS report will be helpful for analyzing bank counterparty risk.
- Exposure to troubled euro countries. While the report does not mention specific bank names, it does note that at the end of 2009, eurozone banks had 62 percent of the international exposure to residents of the most troubled countries of Greece, Spain, Ireland and Portugal, with French and German banks accounting for 61 percent of that eurozone exposure ($493 billion and $465 billion, respectively). This means that the internationally active French and German banks will need to be especially proactive in talking about their potential exposures and ability to absorb losses. Despite this, treasurers with counterparty concerns may just steer deposits and other business away from these banks until there is further clarity.
- Shifting business to emerging markets. The other trend that the BIS report makes clear is the shift in international claims to emerging markets. While in general international bank balance sheets have been shrinking, the proportion of their balance sheets linked to emerging market activities is on the rise, as banks have steered funds towards the faster-growing regions of the world and away from those where the pace of economic recovery was sluggish. International claims on residents of emerging markets grew by $37 billion during the last quarter of 2009, according to the BIS, and cross-border claims on borrowers registered their largest advance ($70 billion) in six quarters. The biggest part of this rise was in Asia-Pacific, with China, Korea, Taiwan and India leading the expansion.
- The BIS stressed that a recovery was in the making with improvements in the US and parts of Europe. Nonetheless, the amounts of exposures as it related to the banks’ Tier 1 capital was worrisome. The combined exposures of German, French and Belgian banks to the public sectors of Spain, Greece and Portugal amounted to 12.1 percent, 8.3 percent and 5.0 percent, respectively, of their joint Tier 1 capital, according to the BIS. This compares to combined exposures of Italian, Dutch and Swiss banks to the same public sectors of 2.8 percent, 2.7 percent and 2.0 percent, respectively, of their Tier 1 capital. The ratios were also considerably higher than those of banks in the US, the BIS said.
Taken together, these points from the BIS suggest that, everything else being equal, treasurers should consider evaluating bank counterparties on the strength of their positions in emerging growth markets and balance this against their exposure to troubled Europe.