Europe’s banks face collateral needs’ challenge

Europe’s biggest banks will need billions of dollars from September to meet collateral requirements for derivatives and hedge them from potential risk amid signs of global economic slowdown. This new key rule will be approved by the European Commission, the bloc’s executive arm. Whether they could afford or not, these regulations will require banks in Europe to hold more cash as a buffer against market shocks.
It is a challenge whether the industry could implement the rules in time for the September 2016 start date — just six months away.
The rules may require EU buyers and sellers of swaps to set aside between 200billion euros ($220.5 billion) and 420 billion euros in total once they are fully effective in 2020, three European regulators said on Tuesday in final draft standards.
The requirement aims to stiffen standards for swaps contracted directly between traders rather than being settled at clearing houses.
The financial industry must revise thousands of legal documents, test “the overall reduction of systemic risk and the promotion of central clearing are identified as the main benefits of this framework,” the European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority said in the document.
After the 2008 credit crisis, regulators around the world pledged to increase the amount of securities, cash and other collateral backstopping trades in the $553 trillion global swaps market.
The extra collateral is meant to protect against the threat that the default of one trader spreads risk to others and potentially throughout the financial system.
But the effects of increased industry regulation are paltry compared with the challenge posed by fintech, said Erste Group Bank CEO Andreas Treich last week.
Though regulators and officials in Europe are increasingly aware that their policies are hurting banks, negative interest rates can’t be passed onto customers for fear they’ll take their deposits elsewhere.
For smaller lenders, increased regulation means more bureaucracy, which in turn takes away resources that might otherwise be helping the economy.
Former hedge fund manager and Goldman Sachs alumnus Raoul Pal said negative interest rates are the chief reason why the bank stocks are in trouble. He said European banks have a tougher time coping in the environment than US banks.
The major European banks are already being stretched by global worries and issues within the banking system. The trouble could spread to US banks.
Some of Europe’s biggest banks are on the brink of a crisis that echoes the 2008 meltdown, as fears over the global economy escalate. Deutsche Bank, Credit Suisse, Santander, Barclays and RBS are among the stocks that are falling sharply sending shockwaves through the financial world.
At the height of the financial disaster in 2008, the Government was forced to step in and rescue Lloyds Banks and RBS from liquidation, while the European Central Bank gave huge bailouts to Spain, Greece, Portugal and Italy.
Last month, the head of the European Central Bank Mario Draghi raised expectations that it could undergo yet more Quantitative Easing in March — in effect printing billions of pounds worth of money — in the face of ongoing economic fears.
As regulations require banks in Europe to hold more cash as a buffer against market shocks, it will be difficult for the banks to cope in the light of negative rates and plunge of bank shares to their lowest levels for years.
It goes without saying that the fears over oil prices and China’s slowing economy are tumbling stock values and edging investors towards selling off oil and mining companies.
The scenario is bleak as panic is spreading to other sectors. This is also sending shock waves across the banks that try desperately to assure scared customers that they could turn things around.
In a word, the regulators have to take into account the concerns of the banks and their ability to afford billions of dollars in order to meet the collateral requirements.