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Db Euro Banks

Db Euro Banks

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Published by: drakiko on Apr 21, 2011
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   I  n   t  e  r  n  a   t   i  o  n  a   l   t  o  p   i  c  s    C  u  r  r  e  n   t   I  s  s  u  e  s
 Authors*
Christian Weistroffer+49 69 910-31881christian.weistroffer@db.comJochen Möbert+49 69 910-31727 jochen.moebert@db.com
Editor
Bernhard Speyer
Technical Assistant
Angelika Greiner
 
Deutsche Bank ResearchFrankfurt am MainGermany
Internet:
www.dbresearch.com
E-mail:
marketing.dbr@db.com
 Fax:
+49 69 910-31877
 Managing Director
Thomas Mayer
The Bank for International Settlements (BIS) consolidated bankingsector statistics provide a comprehensive data set on banks
cross-border exposure.
We show how the data can be used most effectively tomonitor potential threats to banking sector stability. We explore structuralvulnerabilities at the country level, but also look at bilateral exposures within anetwork context.
 With regard to current hotspots, we find that both Germany and
France display relatively high exposure to the euro area’s peripheral
sovereigns.
The data show that German and French banks have a higher share
of their exposure directed to the euro area’s peripheral sovereigns than most other 
countries. Moreover, the UK and Germany
 –
but also Belgium and Denmark
 –
 have relatively large exposure to the private sector in Ireland, although the BISfigures overstate true exposure
due to Ireland’s role as a centre for financing
vehicles.
Interconnection among the peripheral countries may constitute afurther channel for contagion in the euro area.
Portugal, for instance,displays large exposures to Spain and Greece but has some exposure also toIreland, while Spanish banks are significantly exposed to Portugal. Greece, bycontrast, has little exposure to other euro-area peripherals but has strong linkswith Romania, Bulgaria and further Eastern European countries.
Th
e data also show that banks’ exposure to the current hotspots
seems to be limited if measured against total bank assets.
This doesnot rule out contagion risk due to relatively large exposures of individual banks ornon-bank financial institutions. After all, market perceptions of debt sustainabilityremain an important factor that may affect banking sector stability.
*The authors would like to thank Luiza Antoun-de-Almeida and Steven Schott for excellent researchassistance.
 
November 26, 2010
Monitoring cross-border exposure
A primer on how to exploit the BIS banking statistics
0.000.050.100.150.200.250.30FrenchbanksGermanbanksBritishbanksSpanishbanksUS banks JapanesebanksItalianbanksGreeceIrelandPortugal
Banks' exposures to the euro area's peripheral countries
Claims on foreign sovereigns in % of total bank assets of lender
Sources: BIS Quarterly Review, national sources, DB Research
 
Current Issues2 November 26, 2010
Monitoring banking sector risk
Empirical evidence demonstrates thatbanking sector risk arises mainly from twosources:(i) a common exposure of banks to(domestic or foreign) macro risks,
1
 (ii) contagious effects between banks,markets and countries.In systemic crises, usually both kinds of riskadd to and reinforce each other. Thus, bothaspects need to be considered whenmonitoring banking sector risk. Although anumber of tools have been developed toassess banking sector risk, there is noconsensus yet as to how to measuresystemic risk.
2
 
1
 
Complementing the approach presented in thispaper, Weistroffer and Vallés (2009) developed amonitoring tool to assess the risk of macro shocks tothe banking sector.
2
 
A more elaborate discussion about the challengesof measuring systemic risk can be found in Borio andDrehman (2009).
Country abbreviations
AU AustraliaAT AustriaBY BelarusBE BelgiumBG BulgariaCA CanadaHR CroatiaCY CyprusCZ Czech RepublicDK DenmarkEE EstoniaFI FinlandFR FranceDE GermanyGR GreeceHU HungaryIE IrelandIT ItalyJP JapanNL NetherlandsPL PolandPT PortugalRO RomaniaSP SerbiaSK SlovakiaSI SloveniaES SpainSE SwedenCH SwitzerlandTR TurkeyUK United KingdomUS United States
Introduction
The Bank for International Settlements (BIS) consolidated bankingstatistics provide a rich data set of aggregate cross-borderexposures. The data are used primarily by the BIS, central banksand supervisory authorities to monitor vulnerabilities of and possiblespill-over effects for national banking sectors. It allows quantifying towhich extent banks are exposed to foreign credit risk
 –
therebycomplementing the national view on bank credit exposures. The BISstatistics provide a valuable data source not only to the officialbodies, but also to institutional investors and internationally activebanks. Using the data on cross-border exposure can greatly benefitthe assessment and understanding of bank systemic risk
 –
 especially for the developed countries, which form the bulk of theBIS reporting countries.This article provides a primer on how the BIS consolidated bankingstatistics can be used to monitor banking sector risk that stems fromcross-country
lending 
exposure. The data can also be used to lookat the transmission of shocks through banks
foreign
funding 
 exposure
 –
which we plan to address in a follow-up paper. Inaddition to providing a brief introduction to the BIS statistics, thispaper demonstrates how network analysis can be deployed to
produce a bird’s eye view on interlinkages and structural changes in
cross-border claims.
1
The analytical framework presented in thispaper puts the data into perspective and helps to uncover
 –
 sometimes not so obvious
 –
cross-country dependencies.We start by describing the scope and limitations of BIS data. Next,we calculate simple ratios at the country level that help assess thevulnerability of lenders to cross-border exposures. We then proceedby establishing a network of 19 BIS reporting countries and assesstheir mutual dependencies.
2
Responding to the heightened interestin the EU peripheral countries, we finally show how problems inthese countries translate into exposures of the international bankingsystem.
New interest in cross-country exposures
The financial crisis has demonstrated
 –
once again
 –
that significantrisks to national banking sectors can stem not only from domesticasset and credit markets but also from cross-border exposures.Germany provides a case in point. Prior to the financial crisis,country risk indicators at the national level typically issued no alerts.However, German banks held a significant portion of claims on USborrowers (although to a good deal off-balance sheet), which leftthem highly vulnerable to the international credit crisis. Likewise,Belgium, the Netherlands and Switzerland were adversely affectedthrough their
banks’
US exposures.
1
Our approach is closely related to work by McGuire and Tarashev (2007), Hattoriand Suda (2007), Espinosa-Vega and Solé (2010) as well as to a recent reportpublished by Fitch Ratings (2010), who all apply network analysis to the BIS
consolidated 
banking statistics. By contrast, Von Peter (2010) looks at the BIS
locational 
banking statistics to identify important banking centres using networkmethods. Castrén and Kavonius (2009), in turn, use euro area flow of funds datato identify sectors and channels through which local shocks may propagatethrough the financial system.
2
Australia, Austria, Belgium, Canada, Denmark, France, Germany, Greece, Ireland,Italy, Japan, the Netherlands, Portugal, Spain, Sweden, Switzerland, Turkey, theUK and the US.
 
Monitoring cross-border exposureNovember 26, 2010 3
With regard to the debt sustainability issues currently witnessed insome euro-area countries, banks face significant foreign exposures,again in absolute terms. France and Germany seem to beparticularly exposed to the euro-area peripheral countries. In thiscontext, financial analysts and the public have gained valuableinsights from the BIS data, guiding them to quantify the possibleimpact of sovereign debt problems in the euro-area peripheralcountries.
Scope and limitations of the BIS statistics
The BIS statistics look at bank
s’
foreign claims, which includesloans, deposits placed, holdings of debt securities, holdings inunconsolidated banks or non-bank subsidiaries and other on-balance sheet items. The statistics cover claims by bank headoffices, including the exposures of their foreign affiliates. Inter-officepositions are being netted out.
3
The BIS reporting schemedistinguishes between reporting countries and non-reportingcountries. For the 26 reporting countries
 –
usually the moreadvanced economies
4
 
 –
the BIS publishes bank claims on all othercountries. The non-reporting countries
 –
of which there are morethan 200
 –
are captured only in their role as borrowers.
5
The data isupdated on a quarterly basis.Already from June 1999, bank claims are reported on an immediateborrower basis, where each loan is attributed to the
borrower’s
country of residence.
6
Since 2005, the BIS has also providedinformation on a so-called ultimate risk basis, which accounts for theresidency of the ultimate obligor. In this case, the statistics accountfor the fact that the head office of a legally dependent obligor mayreside in another country. In addition, risk transfer via creditderivatives, guarantees or other contingent commitments is takeninto account: The country that has sold credit protection or issued acredit guarantee then becomes the ultimate risk-bearing country.An important limitation is the difficulty to obtain a two-dimensionalbreakdown, i.e. sector breakdown plus bilateral country breakdownof the data. At the national level, the BIS generally
reports banks’
total exposure vis-à-vis another country or total foreign exposurevis-à-vis banks, non-banks and governments in aggregate, but notexposure to a specific sector in a specific country (see figure 1).As there is an exception to every rule, the BIS in June 2010 for thefirst time published country-specific sector data on an ad-hoc basisin its Quarterly Review (BIS, 2010a). The data was updated inSeptember 2010 (BIS, 2010b). In its Quarterly Review the BISreported bank exposures of several large countries to Greece,Ireland, Portugal and Spain, distinguishing between claims vis-à-visbanks, non-banks and governments (see figure 3 for bank claims ona selected group of EU peripheral sovereigns). Likewise, theDeutsche Bundesbank reports
German banks’ exposure to specific
3
For a detailed description of the database, see BIS (200
6): ‖Guidelines to theinternational consolidated banking statistics―; online access:
4
The countries mentioned in footnote 1, plus Brazil, Chile, India, Mexico, Panamaand Taiwan.
5
Finland has stopped reporting bilateral claims as of December 2003.
6
For an elaborate discussion of how the statistics evolved over time, see BIS(2005).242526313668931421662130 250Swiss banksJapanese banksItalian banksDutch banksBelgian banksUS banksSpanish banksFrench banksBritish banksGerman banks
Banks' exposure toeuro-area periphery
EUR bn, Q2/2010, total bank claims onPortugal, Ireland and Greece
Source: DB Research
2
0.71.41.50.25.72.76.81.71.81.38.32.07.816.02.63.44.20.72.818.121.2
0 5 10 15 20 25ItalyJapanUSSpainUKGermanyFranceGreecePortugalIreland
Source: BIS Quarterly Review, DB Research
Exposure to sovereignborrowers
EUR bn, Q1/2010, bank claims on euro-areaperiphery sovereign borrowers
3
National banks
Source:BIS, DB Research
The BIS consolidatedbankingstatistics
Country AForeignbanksForeigngovern-mentsClaimsvis-à-visForeignnon-banksCountry BCountry C
1

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