Derivatives footprint of top EU banks shrinks

Deutsche Bank reduced these exposures by 12% alone

Derivatives fell as a portion of total leverage exposure at the eight systemic eurozone banks between end-2019 and end-2020, while on-balance sheet assets surged.

Aggregate derivatives exposures, as disclosed in leverage ratio common disclosures (LRCom), totalled €449.8 billion ($543.8 billion) at the end of last year across BNP Paribas, Crédit Agricole, Deutsche Bank, Groupe BPCE, ING, Santander, Societe Generale and UniCredit, down almost 8% year on year.

Deutsche Bank reported the sharpest fall in these exposures, of 12% to €99 billion. Crédit Agricole, Santander and ING were the only three of the group to see derivatives increase materially over the year, by 15%, 14% and 10%, respectively.

 

In contrast, on-balance sheet assets, prior to regulatory adjustments, increased 6% in aggregate year on year to €9.23 trillion.

Percentage-wise, these increased most at BNP Paribas over 2020, by 17% to €1.69 trillion. Deutsche Bank was the only lender of the group to actually reduce on-balance sheet exposures year on year, by 7% to €795 billion.

The growth trend in relation to securities financing transaction (SFT) exposures, which covers repo, was mixed. In aggregate, growth in these exposures was flat year on year. However, BNP Paribas and Crédit Agricole saw their SFT exposures balloon massively, by 32% and 23%, respectively. On the flip side, SFT exposures fell dramatically at UniCredit and Santander, by 34% and 20%, respectively.

There was little year-on-year change in off-balance sheet assets. Collectively, these exposures amounted to €995 billion, up just 1% on end-2019. These increased most at Groupe BPCE, by 7% to €85.1 billion.

After taking into account regulatory adjustments, including a carve-out of central bank deposits from the exposure measure allowed by European authorities in the wake of the coronavirus crisis, aggregate leverage exposure of the eight banks came to €9.63 trillion at end-2020, down almost 2% on end-2019.

The leverage ratio of the eight banks averaged 5.3% at end-2020, up from 4.9% a year prior. UniCredit’s improved the most, by 70bp to 6.2%. However, much of this uplift was due to the central bank deposit exemption. Excluding this effect, UniCredit’s leverage ratio was 5.5% at end-2020, flat on a year prior.

 

What is it?

The Basel Committee introduced a leverage ratio common disclosure template in 2014. This obliges banks in Basel member jurisdictions to break down the components of their leverage exposure into on-balance sheet, off-balance sheet, derivatives and SFT exposures.

On-balance sheet exposures encompass all assets except those deducted from Tier 1 capital.

Derivatives exposures are calculated as the total replacement cost of all derivatives plus an add-on for potential future exposure, after taking into account permitted netting and collateral arrangements.

SFT exposures are calculated as the sum of net repo assets and a counterparty credit risk exposure add-on.

Off-balance sheet exposures include commitments, such as liquidity facilities, direct credit substitutes, acceptances, standby letters of credit and trade letters of credit, adjusted for conversion to credit equivalent amounts.

Why it matters

The European Central Bank told lenders they could deduct central bank deposits from their leverage exposure measures in September last year, and it’s clearly helped improve the capital position of some of the systemic banks – at least on paper. In fact, without the relief, the average leverage ratio of the top lenders would have ended 2020 lower than the year before.

The ECB’s relief only lasts till end-June, though the agency could extend the carve-out if it so desired. Therefore, the banks only have a short time in which to bolster their leverage capital positions to pre-Covid levels. ING and Deutsche Bank have the lowest ratios of the group if the relief were not to apply, suggesting they’ll be the most motivated to cut exposures and build capital ahead of the expiry date.

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