Russian bank risks jump as Europe's halves

The amount the Russian government would need to inject in its banking system in the event of a financial crisis – defined as a 40% semi-annualized fall in global stock markets – jumped from €700 million earlier this year to more than €7 billion, according to the latest projections from a systemic risk index (SRisk).

As the conflict with Ukraine triggered a rout in the Russian stock market and the freezing of dollar liquidity, banking risks have jumped, according to a systemic risk index from the Centre for Risk Management (CRML) at HEC Lausanne, University of Lausanne, which gauges size, leverage and vulnerability to equity market shocks.

In recent weeks, the Central Bank of Russia (CBR) adopted a free float and an inflation-targeting regime as an attempted circuit-breaker amid a crisis in rouble markets and capital outflows. Russian bank profitability has been savaged by the recession.

The sector benefits from limited external funding – institutions are typically deposit-funded – a refinancing risk that has diminished the sovereign’s creditworthiness, but presents no immediate systemic danger, and the CBR’s willingness to provide short-term refinancing instruments.

However, loan expansion and Basel III have increased the need for Russian banks to raise common equity and hybrid debt to boost their capitalization ratios amid a vanishing western investor base.

Regional conflict has also undermined the equity buffers for banks in Turkey, as the country shares borders with Syria and Iraq, while the prospect of a US rate rise has stemmed capital flows in the current-account-deficit economy.

During the global financial crisis, its SRisk score was a negligible €20 million, but this has increased to €280 million, from €180 million in June. Still, this is substantially below the record SRisk for Turkey of €980 million at the end of 2013, as presidential elections triggered domestic political uncertainty.

In the main, SRisk across Europe has fallen substantially since 2012, cut by at least a half in the surveyed sovereigns, with Portugal and Ireland declining by a factor of 10 since the beginning of the year.

Confidence nurtured

The ECB’s stress-test and attempts to reflate the eurozone economy has nurtured some confidence that regional lenders, particularly in peripheral Europe, might be on the mend. Nevertheless, the improvements are not uniform.

Michael Rockinger, of CRML, says: “There are signs systemic risk are rising in some European countries. French and Italian banks have seen rapid increases in capitalization during 2014 of 23% and 14% respectively compared to much more modest increases in the UK and Switzerland. In Germany, there has actually been a reduction in capitalization.”

He adds Portuguese-banking risks have grown, after the Banco Espírito Santo scandal.

“After the demise of Banco Espírito Santo, there are two Portuguese banks for which we have data,” says Rockinger. “For the smallest, Banco BPI, SRisk doubled from €250 million in April 2014 to €500 million at the end of September. While obviously a significant increase, it is still a long way from the €1 billion SRisk that the bank carried in late 2013.

“Banco Comercial Português, the largest private bank in Portugal, has been more turbulent in recent months. Its SRisk declined continuously until April 2014, reaching a low of about €1.4 billion. By June 2014, SRisk had increased sharply to €2.25 billion before falling again about €1 billion. This decrease was due to a repayment of a loan of €1.85 billion received from the Portuguese government which greatly reassured the markets.”

Deutsche Bank continues to be the riskiest bank in Europe with an SRisk rating of €70 billion, followed by BNP, Barclays, Crédit Agricole and Société Générale.

More information on the methodology can be found on at the CRML at HEC Lausanne.