Posted on 03/10/2003 8:52:13 AM PST by Starwind
Study Shows European Banks Exposed To Credit Derivatives
By Jeff Coelho
OF DOW JONES NEWSWIRES
LONDON (Dow Jones)--The swelling growth in the number of European banks using credit derivatives to enhance revenue calls for more accounting transparency, as less-experienced financial institutions could be at risk, rating agencies and analysts said Monday.
Fitch Ratings said the preliminary results from its new study of a broad cross section of global financial institutions showed about three-quarters of European banks surveyed were net sellers of protection through credit derivatives.
German banks, particularly the state Landesbanken, were largely involved as net sellers of protection, showing an aggregate of about EUR11 billion, Fitch said.
A credit derivative is a contract between a holder of an asset, or buyer of protection, and a seller of credit, whereby the credit risk of a risky asset is transferred from the buyer to the seller of protection.
Analysts said heavy exposure could spell trouble for banks facing financial problems, notably the ones than are new and inexperienced to the credit derivative game.
"Landesbanks are heavy sellers of protection," said Ian Linnell, a managing director at Fitch Ratings. "This is an additional credit risk that people need to be wary of and could result in additional credit losses, and that would have implications for their owners."
"One of the reasons why we've done the survey in the first place is that there is a real lack of transparency in the market. There is a greater need for transparency and disclosure," he said.
Fitch surveyed about 200 global financial institutions in the $2 trillion market and received 147 respondents.
The preliminary study showed that on a notional basis, institutions surveyed reported total gross sold positions in credit derivatives of $1.2 trillion. Of that amount, $728 billion, or 61%, came from U.S. institutions, whereas the vast majority of the balance represented European banks and insurance companies.
Counterparty risk was concentrated among the top 10 global banks and broker dealers, Fitch said, citing J.P. Morgan Chase, Merrill Lynch and Deutsche Bank as the top three counterparties.
It named General Motors, DaimlerChrysler, Ford, General Electric and France Telecom as the borrowers whose debt is most frequently insured in the credit derivatives market.
Fitch's Linnell said the agency will complete its analysis over the next three months, after meeting with banks and financial institutions on an individual basis for credit assessments. Also, the rating agency plans to share its findings with regulators in order to encourage greater disclosure. . Small Banks At Risk
While credit derivatives are commonly used to diffuse risk, some banks may be at risk. U.S. billionaire investor Warren Buffett has referred to derivatives as "time bombs" and "weapons of mass destruction."
Samuel Theodore, a managing director at Moody's Investors Service, said it's likely that no more than 10 to 15 banks in Europe he would not expect to be selling credit derivatives were actually doing so. He said some banks in Germany, Italy, the U.K. and Spain could be vulnerable to risk exposure.
"Our concern relates to some of the small banks who sell credit protection, and they sell with the conviction that the credits that they sell credit protection against are not going to default. It's not so much these banks will tank but one has to question management control and their understanding of this business," he said.
"I don't feel the instrument (credit derivative) itself is a time bomb. I don't think we would've witnessed the state of growth in the banking industry without credit derivatives. I would like to see more disclosure to more accounts. It's a good tool to increase transparency, but banks have concerns about the volatility," he said.
In Brussels, the International Accounting Standards Board is meeting with bankers this week to discuss and debate accounting standards, particularly the rules associated with derivatives.
Many European banks are at odds with forthcoming changes to so-called "IAS 39" accounting rules that will require them to show how derivatives impact their accounting books on a daily basis. They say the result will be much more volatile gains and losses on the books, which may not be entirely representative of the bank's long-term strategy.
Still, analysts said more disclosure would be beneficial to the market.
"There is a limited amount of information and you don't know the amount of the exposure, so you have to give the management the benefit of the doubt that they know what they're doing," said Roberto Bella, a credit analyst at Barclays Capital. "There is very little you can do but keep your fingers crossed that the managers are handling the exposure appropriately."
-By Jeff Coelho, Dow Jones Newswires, 44 20 7842 9318,
jeff.coelho@dowjones.com .
(END) Dow Jones Newswires
03-10-03 1138ET- - 11 38 AM EST 03-10-03
Pesonally, I am not in favor of having govenment-sponsored leviathins dominating such a critical part of our financial sector. What do you think?
Free Republic Stock Market/Economy Discussion List. Freep Mail me if you want on or off this list.
The backstory is one individual, Ramy Goldstein’s, contribution to the financial fiasco. The aggressive equity derivatives maven, set up a global equity derivatives group within UBS as a world unto itself—outside the bank's risk management controls. He earned enormous profits for the bank, and multimillion-dollar bonuses for himself. UBS created two separate and overlapping risk control functions within UBS, both of which reported to the heads of business units and not to the bank's senior management.
Goldstein's huge money-making success and the self-made conflicts of interest within the bank insulated him from efforts to control his trading group. The risky trades and lack of controls caught up with him in 1997, when a series of losses in his bailiwick forced UBS into the merger.
Q Does this sound familiar?
A Has the MO of Enron written all over it.
M&A's anyone?
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