ECB warns of hit to top European banks if funds run into trouble

The euro zone’s top banks may take a hit if their financial clients, such as funds, insurers and clearing houses, withdrew their deposits or otherwise ran into trouble, the European Central Bank warned on Tuesday.

The ECB study looked into the risk of spillovers from so-called shadow banks — such as funds and other financial companies that provide funding in one form or another — to traditional lenders, and vice versa.

It found the exposure both in terms of bank assets, such as loans, and liabilities, such as deposits, was concentrated in the euro zone’s top 13 lenders, including its eight globally important banks.

The biggest risk it identified was that shadow banks withdrew their funds from banks, such as deposits and repurchase agreements. These account for 13 per cent of all traditional banks’ liabilities — or more for larger banks.

This could happen if the shadow banks — or non-bank financial intermediaries (NBFI) in the regulators’ jargon — were themselves hit by outflows or lost confidence in a bank.

“This funding may be highly sensitive to the credit quality of the recipient banks and can amplify the funding pressures faced by banks if the soundness of their fundamentals has been called into question,” the ECB said.

Other spillover channels included forced sales of assets by shadow banks, which would cause losses at traditional banks because their portfolios often overlap or are correlated, the ECB said.

It added that distress at systemically important lenders would also spell trouble for shadow banks.

“If one or a group of such (banks) were to become distressed, there would probably be substantial ramifications in terms of the ability of significant parts of the NBFI sector to manage liquidity and market risks,” the ECB said.

The ECB, which used confidential data it obtained in its role as the euro zone’s top banking watchdog, did not name any firm in the report.

The euro zone’s global systemically important banks are BNP Paribas (BNPP.PA), Deutsche Bank (DBKGn.DE), BPCE, Credit Agricole (CAGR.PA), ING (INGA.AS), Santander (SAN.MC), Societe Generale (SOGN.PA) and UniCredit (CRDI.MI).