Posted Sep 30, 2022, 7:54 PM
No Lehman Brothers bis. Energy crisis or not, that’s what banking supervisors want to avoid at all costs. On Thursday evening, the European Banking Authority (EBA) ruled out any prospect of easing capital constraints on banks so that they provide more guarantees in derivatives trading operations that allow energy companies to hedge against the volatility of prices and their future deliveries.
“The soundness and sensitivity to risks of regulation should not be degraded, as this could put the whole of financial stability at risk”, declares the EBA in its response to the European Commission, before recalling that the system current margin calls was calibrated in response to the financial crisis of 2008-2009.
“Our opinion is that watering down the prudential requirements for clearing players and their counterparties in derivatives transactions should be avoided,” the President of the European Central Bank, Christine Lagarde, had already estimated in early September.
Banks are already heavily exposed. Outstanding loans and advances to energy groups peaked at 324 billion euros at the end of June according to preliminary data, details the EBA. As for the actual assets on banks’ books linked to commodity derivatives operations – 40% of which are energy-related – they more than doubled to 50 billion euros at the end of March compared to the second quarter of 2021. Growth of more than 10% was further recorded between March and June 2022.
Call for more transparency
“Bank support has grown rapidly over the past six months and banks are reaching a threshold where internal risk management limits are starting to become restrictive,” says the EBA, which considers this to be part of institutions’ risk management. Derivative exposures are concentrated in the hands of a very small number of banks, with the largest alone accounting for 40% of these, and the top 10 90%. A small number of banking operators also support credit operations.
In the market, a number of players were pushing for other types of guarantees to be accepted as collateral, for example letters of credit or emission certificates. But these would be capital intensive for the banks and not necessarily necessary.
Bank guarantees are only used in small doses, notes the EBA, which consulted a large number of market players. The norm is the use of credit lines. On September 22, the ESMA, the authority of the financial markets, had also positioned itself against an enlargement.
Moreover, the system is proving to be quite robust at this stage: if the “magnitude and frequency of requests for collateral are a real challenge today, “the EBA has not however been alerted to any case of appeal of missed margin, including during the peak in energy prices in August”. The authority deduces from this that the banks and their customers know how to deal with the situation in the state of the rules.
On the other hand, the EBA demands that more transparency be provided on margin calls which reach billions per day, due to the tensions induced on the cash flow of financial institutions: “In a number of cases, banks face significant liquidity outflows, particularly in dollars, on fairly short notice in major market movements”. Something to recall the specter of the financial crisis.
