Banks 'could lose billions' from Madoff fraud

European banks have revealed potential losses of millions of euros resulting from exposure to the alleged fraud at Madoff Investment Securities in the US.

Banco Bilbao Vizcaya Argentina (BBVA), the second-largest bank in Spain, says it may lose EUR300 million from the hedging of structured products linked to Madoff's funds. In a statement to Spain's stock market regulator, BBVA said it acted on behalf of other financial entities and institutional investors to set up products linked to third-party funds invested in Madoff Investment Securities.

"If, as a consequence of the fraud alleged by the Securities and Exchange Commission, the value of these funds was zero, the maximum potential loss for BBVA linked to coverage of this activity would be around EUR300 million," the statement said. BBVA confirmed that it has no direct investments in Madoff.

Santander, Spain's largest bank, says it has invested EUR17 million of its own funds in a Madoff investment fund. The bank has revealed a EUR2.33 billion exposure to Madoff through its Optimal Strategic US Equity fund, which commissioned Madoff Securities to execute its investments. Around EUR2.01 billion of the exposure in the Optimal fund consists of money from institutional investors and international private bank customers. The remaining EUR320 million mainly comprises structured products partially indexed to the performance of the Optimal fund, and is part of the investment portfolios of Santander's private banking customers in Spain.

French bank BNP Paribas has also confirmed it has risk exposure to Madoff's funds through its trading business and collateralised lending to funds of hedge funds. If the value of the assets of Madoff's hedge funds is zero due to the alleged fraud, BNP Paribas could lose around EUR350 million. The bank states that it has no investments of its own in the hedge funds managed by Bernard Madoff Investment Services. BNP said it had registered a EUR710 million loss in November, a statement triggered by the effect the Madoff loss had on the earnings expected in its monthly financial statement.

In the UK, the Royal Bank of Scotland says it has exposure via trading and collateralised lending to funds of hedge funds invested with Madoff, which means the bank's potential loss could rack up to around £400 million if the value of the hedge fund assets is nil.

Finally, HSBC has also confirmed that it has provided financing to some institutional clients who invested in funds with Madoff, and is looking at potential exposure in the region of $1 billion.

In total, Madoff's scam is alleged to have defrauded investors of around $50 billion, affecting companies across London, Paris and Tokyo, in a giant pyramid scheme.

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