Banks' Fire Drill for Greece Election - NYTimes.com - 0 views
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In New York and London, banks have set up dedicated crisis teams, and rehearsed elaborate responses.
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Citigroup has $84 billion in loans, bonds and other types of exposure to troubled European countries, plus France. The bank’s filings indicate that all but $8 billion of that exposure is offset with collateral it has collected and hedges on the portfolio.
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Some banks are testing their systems to deal with the possibility of new currencies and preparing guidance for clients on how to operate in such an environment.
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Banks like Goldman Sachs and Morgan Stanley are also looking into the severe legal challenges that would arise if a country exited the euro. Contracts that govern loans, bonds and derivatives in Europe rarely take into account such a situation.
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Consider an Italian corporation that owed a foreign bank 5 million euros, with a loan agreement struck under Italian law. If Italy left the euro, the bank might have less chance of getting euros back after the exit. In that case, the financial firm might be exposed to a new, less valuable currency.
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Recognizing that threat, some banks are trying to move contracts into new jurisdictions like the United States or Britain. By transferring such loan agreements to English law, the banks may increase the chances of getting repaid in euros after an exit, according to legal experts.
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The banks are also trying to protect their balance sheets if they do get stuck with large amounts of assets denominated in a new, weaker currency.
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By doing so, they can better match their assets (the loans) within a specific country with their liabilities (the deposits). Then if a country left the euro zone, the value of the loan might fall in euros, but the banks wouldn’t owe as much to depositors in euros.
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Mr. Lim notes, however, that some large banks, including Deutsche Bank, still have a lot more loans than deposits in countries like Italy and Spain.