ECB Scrutinizes Banks’ Readiness For Possible Tsunami Of Energy Company Defaults

ECB Scrutinizes Banks’ Readiness For Possible Tsunami Of Energy Company Defaults

As we detailed in Trillions In “Liquidity Support Is Going To Be Needed” As Swiss, Finns Join Europe’s Bailout Brigade and Sweden, Austria Start Bailing Out Energy Companies Triggering Europe’s “Minsky Moment,” it appears financial armageddon nears for Europe as the European Central Bank calls for a meeting with top bank executives to discuss how to prepare for a potential ‘Lehman-style’ collapse of energy companies amid worsening energy crisis. 

Conversations between the ECB and lenders are taking place in order to understand the impact of Russian energy giant Gazprom’s sudden decision to “completely halt” all Nord Stream 1 transit altogether due to an “oil leak,” according to Bloomberg, citing people familiar with the talks. The ECB’s letter questions lenders’ readiness following a NatGas stoppage that could trigger a wave of energy company bankruptcies. The central bank wants to see how resilient the lenders will be during a period of duress. Lenders will submit their findings to the central bank in mid-September. At the end of the month, bankers will meet with the ECB for follow-up conversations. These interactions between the ECB and lenders are behind closed doors (for now).

The news of NS1 shuttering NatGas flows to Europe has sparked a series of European governments bailing out energy companies as they can no longer afford high NatGas prices and liquidity dries up. 

Sweden followed in Austria and Germany’s footsteps, who announced emergency liquidity support to electricity producers after the government said it feared Russia’s decision to halt NatGas deliveries to Europe could put its financial system under severe strain. Finland and Switzerland are other countries that have joined the bailout brigade this week. 

The numbers are adding up quickly as European nations are suddenly succumbing to what Zoltan Pozsar dubbed a “supply-chain Minsky moment” for European energy companies. 

It gets better because the crisis, as explained by Norwegian energy giant Equinor ASA, warned that unless there’s government intervention to extend liquidity to energy companies, there could be a, get ready for this, margin call upwards of $1.5 trillion.

The physical energy market appears to be functioning, though the derivatives market could be on the cusp of turmoil, and perhaps why the ECB is asking banks to review their readiness for when shit hits the fan: 

Regulators are pushing banks to ensure they have sufficient reserves for loan defaults by identifying their most-exposed clients as well as the effect on companies that aren’t directly affected by the fallout from Russia’s invasion of Ukraine. Banks will also need to show that they can conduct stress tests and that they’re updating their economic assumptions, said the people.

Other areas of concern are thinly-traded energy derivatives and concentrated exposures to energy traders, although only a smaller number of banks are active in those areas, the people said.

The letter to banks also requested institutions to detail how their analysis has been factored into their overall strategy, and what the first and second-round effects would be from a gas stoppage. –Bloomberg 

Earlier this week, Mark Branson, who leads German regulator BaFin, told the German newspaper Handelsblatt that the “system is still robust … yet in these very dynamic times where you can’t exactly understand where the risks are, and the situation changes from week to week, you need first-class risk management, but banks also need well-filled capital and liquidity cushions and a prudent approach to that capital and liquidity situation.”

Tyler Durden
Fri, 09/09/2022 – 09:10

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