Monoline costs ANZ $200 million

Melbourne-based Australia & New Zealand Banking Group (ANZ Bank) has announced a US$200 million loss provision due to counterparty risk exposures to troubled US monoline insurer ACA Capital.

The provision is taken against credit default swaps entered into between 2005 and February 2007 with the New York-based monoline insurer, whose bond ratings were cut from A to CCC by Standard & Poor's on December 19. Monolines have been in distress as they struggle to meet obligations on their asset-backed securities (ABSs) and collateralised debt obligations of ABS exposures to the struggling US subprime mortgage market.

In a shareholder update after four months of trading, released on February 18, the bank stated that it had no direct exposure to US subprime mortgages, and expects to write back a significant proportion of the provisions in future periods. ANZ chief executive Mike Smith said: “We believe the accounting treatment - which requires  that banks account for the losses on derivatives - overstates the likely loss over the life of the transaction.”

The credit crisis has also forced ANZ to add US$90 million to its provision that loans might fail, because of its dealings with an unnamed commercial property client that has suffered significant credit rating downgrades. A further US$51 million due to failures of a resources client was also added to the losses.

ANZ's interim results are due on April 23.

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