UK banks reveal size of eurozone funding gaps

Three UK banks have published details on the funding mismatches they would face in the event of peripheral eurozone countries reverting to legacy currencies – a risk for which the industry as a whole has been preparing for more than a year, by secretly building single-country balance sheets and trying to better-match assets and liabilities in each.

Barclays, HSBC and Royal Bank of Scotland (RBS) all provided figures in their interim accounts – which is thought to be the first time the size of the exposures have been revealed. In Spain, the three banks had an aggregate exposure of £10.5 billion as of June 30, but Barclays alone reduced its mismatch in the country from £12.1 billion to £2.5 billion during the first six months of the year. RBS said it is trying to “significantly reduce” its Spanish funding mismatch.

“Banks publishing these country-specific balance sheets could be just to emphasise they have local funding and the mismatches are not so big. What they communicate to the market is that they do not fund their operations cross-border, which is a good thing to do,” says Peter Neu, a partner at Boston Consulting Group in Frankfurt.

The risk would only arise if a country leaves the euro. In-country loans could become repayable in the new currency – a revived drachma or peseta, for example – while still being funded by liabilities denominated in euros, sterling or other currencies. The likely depreciation of the new currency would cause a gulf to emerge in the value of in-country assets and foreign liabilities, so banks have been trying to fund peripheral eurozone lending with deposits raised in the same country.

HSBC revealed its in-country assets and liabilities for Greece, Italy and Spain, with the bank’s largest exposure being to the latter, where it has assets of $4.1 billion and liabilities of $2.5 billion, leaving a net in-country funding exposure of $1.6 billion.

In RBS’s results, the bank said total asset exposures to peripheral eurozone countries fell by 10% in the first half of 2012, and stressed it is also making an effort to cut potential funding gaps. “The group’s focus has been on reducing its asset exposures and funding mismatches in the eurozone periphery countries,” it said.

The bank did not disclose figures for Portugal or Greece, claiming the exposures there are modest. In Ireland, assets outweigh liabilities by approximately £12 billion. In Spain, the gap was £7 billion as of June 30, 2012. For Italy, the bank said it has surplus liabilities of approximately £1 billion. “The group is taking steps to significantly reduce its Spanish funding mismatch and expects to make further progress in the second half of this year,” RBS said.

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