EBA Risk Dashboard
limited estimated impact on EU banks from the Russian invasion of Ukraine
The European Banking Authority (EBA) published its Risk Dashboard for the fourth quarter (Q4) of 2021. A special feature highlights the potential impact of the Russian invasion of Ukraine on the EU/EEA banking sector. Based on the EBA’s initial assessment, direct exposures to Russia, Belarus and Ukraine are limited, but second-round effects may be more material from a financial stability perspective.
The Russian invasion of Ukraine has taken a heavy toll on the Ukrainian population, society, and economy. It has escalated geopolitical tensions and a series of unprecedented sanctions have been imposed by the EU, the US, and other countries on Russia and Belarus. Russia has also applied counter-sanctions against the EU and other Western countries.
The war and its repercussions are expected to have direct as well as indirect impacts on EU/EEA banks. The first round effects are mainly linked to EU/EEA banks’ exposures towards counterparties domiciled in Russia, Belarus, and Ukraine, and elevated market risk due to heightened volatility and abrupt risk premium repricing. Exposures towards Belarussian counterparties1 are significantly lower than those to Russian and Ukrainian counterparties. Hence, the following analysis focuses on exposure to Russia and Ukraine.
The EBA’s initial assessment is that the first-round risks to the EU banking system are not a fundamental threat to financial stability. This reflects that direct exposures to Russia and Ukraine are limited. Second-round effects are more worrying from a financial stability perspective. The key drivers of these concerns are the current high level of uncertainty about the outcome of the war in Ukraine and the potentially large impact on the wider EU and global economy of this war. Key drivers include the direct economic fallout of the war including the fiscal impact, the impact of sanctions (from all actors involved), cyber risks, and the longer-term impact on supply chains in the global economy.
EU bank exposures to Russian and Ukrainian counterparties are mostly through subsidiaries in these countries. Many EU/EEA banks, however, also have direct exposures at the head office level or other subsidiaries, typically via loans to non-financial corporates. On the revenue side, further links exist through other business lines, for example, in asset management, investment banking, and private banking.
Banks’ direct asset exposures to Russia and Ukraine are concentrated in a few countries and a limited number of banks. As of Q4 2021, EU/EEA banks reported exposures (loans, advances and debt securities) of EUR 76 bn and EUR 11 bn towards Russian (RU) Ukrainian (UA) counterparties, respectively. Austrian, French and Italian banks reported the highest volume of exposures towards Russian counterparts. Austrian, French, and Hungarian banks were those with the largest exposure towards Ukraine. Yet only Austrian and Hungarian banks reported more than 2% of their total exposures towards these two countries, which are mainly driven by subsidiaries of individual institutions (Figure 1)
More than 80% of the total exposures were loans and advances, mainly towards NFCs (more than 50% of the reported exposures in both countries) and to a lesser extent towards households. Loans and advances towards Russian NFCs and households amounted to EUR 40 bn and EUR 16 bn, respectively, while for Ukraine they reached EUR 6 bn and EUR 1 bn, respectively. Exposures towards Russian general governments amounted to EUR 4 bn and towards Ukrainian general governments were close to EUR 2 bn. EU/EEA banks reported the largest volume of loans and advances towards NFCs in manufacturing (EUR 16 bn), wholesale and retail (EUR 10 bn) and mining and quarrying (EUR 9 bn). Loans towards Russian mining and quarrying NFCs made up more than 10% of the total exposure of EU/EEA banks towards this sector. Sanctions imposed on Russian entities and further disruptions in the supply chain due to the war are expected to have an adverse impact (Figure 2).
Deposits from Russian and Ukrainian counterparties amount to a combined volume of around EUR 82 bn. For Russian counterparties, overall total asset exposures of around EUR 76 bn compare with deposits of around EUR 69 bn. For Ukrainian counterparties overall deposits of around EUR 13 bn are nearly EUR 2 bn higher than total asset exposures. Household deposits outweigh loans to households in the case of Russian and Ukrainian counterparties (see data Annex on Russian and Ukrainian counterparties). However, loans towards Russian NFCs are significantly higher than deposits from Russian NFCs, while deposits and loans towards Ukrainian NFCs are rather balanced. Given that most exposures are through subsidiaries and since the market funding is rather limited in these countries, this would imply that several banks might as well rely on intragroup funding. Furthermore, related to contingent liabilities, loan commitments are roughly half the volume of respective NFC loans for both countries.
As an immediate result of the geopolitical tensions and the war, EU/EEA banks have faced an increase in market risk. Heightened volatility and sudden adjustments in risk premiums affects mark-to-market exposures. This includes, for instance, sovereign exposures recognised at fair value (Figure 3).
Volatility in energy, metals and agricultural markets has intensified since the beginning of the war (Figure 4). Russia-related and commodity derivative exposures are particularly affected. However, indications are that respective derivatives tend to be insignificant overall. Derivatives with Russian and Ukrainian counterparties have a share of up to 2% of other total exposures (as shown in the data Annex on Russian and Ukrainian counterparties) to these countries (calculated based on carrying amounts). Commodity-related derivatives have a share in total derivatives of around 0.2% (calculated based on notional amounts in banks’ supervisory Financial reporting (FinRep). Yet, as volatility in these markets remains elevated, idiosyncratic vulnerabilities cannot be ruled out. Elevated volatility in respective markets includes rising margin calls from commodity related derivatives, which might also imply rising risk of counterparty defaults. Foreign exchange markets have also been affected with a few currencies, mainly from Central and Eastern Europe (CEE), but also from emerging markets more broadly, suffering depreciations against major currencies. This is not least related to the particularly multi-fold implications of the war in this region.
Riferimenti
https://www.eba.europa.eu/eba-risk-dashboard-indicates-limited-direct-impact-eu-banks-russian-invasion-ukraine-also-points