Business World

Tuesday 25 July 2017

Asian banks review funding to French lenders

funding

Rachel Armstrong and Saeed Azhar

One bank in Asia has cut credit lines to major French lenders while five other Asian banks are reviewing trades and counterparty risk as worries about the exposure of French banks to peripheral eurozone debt mounts, banking sources said yesterday.

Rumors on Wednesday that France was to lose its AAA rating, later denied by ratings agencies, helped trigger the biggest widening in the European credit default swap index since the credit crunch in 2008.

That sudden rise in risk perception, combined with sharp share price falls in French banks, prompted some banks in Asia to speed up reviews of counterparty risk and look at whether they should cut exposure to European lenders, sources at each of the six banks in Asia said.

The head of treasury risk management for Asia at one bank in Singapore -- which has a significant presence across the region -- said their credit lines to large French banks had been cut because of the perceived risks in lending to these counterparties.

"We've cut. The limits have been removed from the system. They have to seek approval on a case-by-case basis," the treasury risk official told Reuters. The official declined to name the French banks.

A senior credit trader in Singapore said that when a bank's shares fall that sharply their risk officer will automatically look at how much exposure they have to that lender.

Banks' heightened responses could exacerbate the market strains if they all acted simultaneously with portfolio-at-risk modelling, analysts said.

Snowball

"The thing is if they all use it at the same time they will all sell at the same time when risk goes up, and that will drive prices down and it is like a snowball because then the prices go down and then your value-at-risk ratio will tell you 'oh, I must reduce my risk even more'," said Mark Matthews, head of research at Julius Baer.

Several of the traders and bankers in Asia said that while they had not cut all exposure to any particular institution, they were very cautious about taking on new trading positions with them.

A senior risk officer at a bank in Singapore said "obviously we are having a review", when asked if they were reassessing their positions with European counterparties.

Bankers and risk officers at the five institutions in Asia that were still dealing with French banks said that while short-term lending of up to 30 days was still taking place, they were conducting a thorough review of longer-term credit lines regardless of the type of transaction.

"It's all in relation to (our) take on a French bank's credit risk, regardless of whether it's a swap or interbank lending transaction," said a senior loan banker at a Japanese bank.

Criteria banks are reviewing include looking at whether parts of the credit lines they have in place with their French financial counterparties are as yet unused, and if so can they be reduced.

The term lengths of loans they've granted are also under review, with a view to cutting them where possible.

Lenders are also considering imposing a larger haircut on the European government bonds posted as collateral by the eurozone banks they lend to, the treasury risk official from the bank that has cut credit lines said. (Reuters)

Irish Independent

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