EBA stress test results shed light on sovereign derivatives exposures

European bank sovereign derivatives exposures revealed

The size of individual European banks’ derivatives exposures to sovereign entities were published last month as part of the European Banking Authority (EBA) stress test – figures banks don’t usually report.

The largest exposure to a single sovereign is not held by a major derivatives dealer but by French bank BPCE, which is in-the-money with France to the tune of €3.8 billion. The next largest exposure to the country is held by Crédit Agricole and is €468 million.

The exposures collected by the EBA arise from derivatives transacted with sovereign counterparties, including central and local government entities as of December 31, 2010. The exposures are reported as a net fair value – the difference between the positive and negative value of each bank’s portfolio of trades – meaning some banks are exposed to the counterparty risk of the sovereign, and some sovereigns are exposed to the bank.

German banks feature prominently, with Deutsche Bank having the largest net positions with four sovereigns. Luxembourg and Finland are exposed to Deutsche Bank, while the German bank is exposed to the Czech Republic and Italy. Deutsche’s Italy exposure adds up to a net €1.8 billion, although the bank’s interim report shows its total net exposure to the country, encompassing bonds and loans as well as derivatives, had shrunk from €8 billion at the end of last year (when the EBA data was collected) to just under €1 billion as of June 30.

Meanwhile, WestLB has the biggest exposure to troubled sovereign Ireland with €355 million, while Bayerische Landesbank held the largest exposure to Germany with €2.4 billion.

UK banks also had significant exposures, with the Royal Bank of Scotland holding the largest net positions with Austria, Denmark and the Netherlands – it's in a losing position with the latter two and is only exposed to the counterparty risk of Austria. Meanwhile, Barclays had the largest exposures with Belgium and the UK – in both cases the bank is out-of-the-money – and HSBC had the biggest to Portugal, a positive €259 million.

Meanwhile, local Spanish banking institutions have limited exposure to Spain, with only Caja De Ahorros Y Pensiones De Barcelona having a substantial out-of-the-money exposure of €214 million. Similarly, Portuguese banks also have limited exposure to their own sovereign.

Exposures to Greece are dominated by Greek banks with the National Bank of Greece holding the biggest exposure of €290 million. Other major banks holding large exposures include BNP Paribas with €207 million, and Deutsche Bank with an out-of-the-money €178 million position.