U.S. Bank Exposure to Europe: De Minimus

These stats and commentary on U.S. bank exposure to European debt were provided by a friend of mine, Michael Durante, a hedge fund guy who specializes in large U.S. banks. I believe the legal term for their exposure is “de minimus.” Mike also believes that large U.S. banks are WAY undervalued by the market, as do I.


“As a reminder, the U.S. mortgage market is roughly $10 trillion.

–U.S. bank exposure to France (anybody in France) is roughly $200 billion or 2% of the U.S. mortgage market and half of that exposure is in overnight, fully collateralized Fed funds market equivalent (overnight LIBOR) and the rest largely is made up of direct, collateralized loans to large French companies. The risk of U.S. bank losses? Minimal, at worst. I’d say $0 to $200 million, but nobody will buy that one.

–U.S. bank exposure to Spain is $40 billion and has a similar make-up as France only it’s 0.5% of the U.S. mortgage market.

–U.S. bank exposure to Italy is $28 billion and follows the same trend as above.

–Greece? Too small to measure.

–Portugal? Too small to measure.

–Ireland already bailed out, but less than Spain for a lack of corporate loans to Irish companies = Not many big Irish companies.

And these are gross figures, which means they don’t include insurance and other hedges. Almost none of it is sovereign debt. And when is the last time you heard of a bank losing $ in the overnight LIBOR or Fed funds market? A: never! They are fully collateralized by cash securities in repurchase agreements. In addition, most forget that U.S. banks have over $1 trillion in excess reserves on account at the Federal Reserve.

Liquidity is NOT a U.S. bank problem nor is European credit. What’s next? Y’all will panic that Greenland may default? Did Latin America bring down the U.S. financial system in the 1990s?

Europe is like Japan. They’ll slow boat this issue and remain in a below par economic growth mode for the rest of our lives. The hope of Eastern Europe as a growth zone for the Euro is over. The experiment didn’t work.”


Comments (5)

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  1. Raven says:

    Thank you Bob. I feel much better with a professional at the helm.

  2. Joe says:

    The does seem to be a disconnect with the data reported elsewhere.

    Per WSJ: U.S. Bank Exposure to Europe Could Be $640 Billion, Per Congressional Paper



  3. Joe says:

    …and I’m not sure what the implications are of the related data below but it doesn’t look good to me.

    OCC’s Quarterly Report on Bank Trading and Derivatives Activities
    Second Quarter 2011

    Executive Summary

    –Insured U.S. commercial banks reported trading revenues of $7.4 billion in the second quarter, 11% higher than $6.6 billion in the second quarter of 2010. Trading revenues in the second quarter of 2011 were 1% lower than in the first quarter of 2011, but were nevertheless the fourth highest on record.
    –Trading risk exposure, as measured by Value-at-Risk (VaR), increased in the second quarter. Aggregate average VaR at the 5 largest trading companies rose 5.9% from the first quarter to $717 million. VaR in the second quarter 2011 was unchanged from the second quarter of 2010.
    –Credit exposure from derivatives increased in the second quarter. Net current credit exposure increased 3%, or $11 billion, from the first quarter of 2011, to $364 billion.
    –The notional amount of derivatives held by insured U.S. commercial banks increased $5.3 trillion, or 2.2%, from the first quarter of 2011 to $249 trillion. Notional derivatives are 11.6% higher than a year ago.
    –Derivative contracts remain concentrated in interest rate products, which comprise 82% of total derivative notional amounts. Credit derivatives, which represent 6.1% of total derivatives notionals, rose 2.2% to $15.2 trillion.


  4. John from Iowa says:

    The real exposure lies in the land of derivatives and swaps. And it isn’t the net exposures that count, it is the gross exposures. The big risk is counterparty risk.

    Who is on the other side of all of the supposed hedges? And if one or several of them can’t meet their obligations, then the supposed perfectly hedged exposures become gigantic one-way bets. Take a look at the size of JP Morgan’s gross derivative book for an idea of how potentially exposed American banks are.

    Maybe we’ll get lucky and Germany will write big checks to the Club Med countries, or decide to let the ECB quantitatively ease, but to pretend that the system is not incredibly fragile is either to misrepresent the truth or to not understand it.

  5. Hondo says:

    Using Latin America is a red herring. We had the ability and used it to increase debt out the A## to offset any negatives. Matter of fact that the MO of the FED for the last 30 years. At any slight hint of a wave…juice the liquidity engine…that’s why we are where we are today. The FED did not understand and still does not understand what is on the balance sheets of the TBTF banks…that is the problem and rhetoric to the opposite is laughable.