Europe’s banks are increasing their interdependence and shedding complex assets, according to the European Banking Authority.

Banks in the EU are simplifying their balance sheets and stepping away from highly complex financial instruments, while at the same time increasing their overall exposures and interconnectivity, according to the European Banking Authority (EBA).

In a report released in late July, the EBA published key metrics on the systemic importance of the EU’s 37 largest lenders in an effort to increase transparency in a field notorious for its opacity.

The disclosure covers institutions with leverage ratio exposure larger than €200bn and uses data from both 2013 and 2014. Perhaps the most striking data point to emerge from this period is the €24,450bn reduction in the aggregate value of sophisticated instruments such as over-the-counter (OTC) derivatives and trading, and available-for-sale (AFS) securities, reflecting a major retreat from trading among European lenders as capital ratio increases begin to bite. For purposes of this article comparative figures include only 36 banks, as the data for Spain's BFA is not listed for 2013.

37 largest EU banks-total exposures

Despite this overall reduction in complex assets, the overall value of so-called level 3 assets, a group of highly illiquid and hard-to-value instruments such as mortgage-backed securities, has increased by 6.54% to €230.58bn. The valuation of these assets, done through assumed inputs, can be particularly tricky, and they proved to be a major weak point on bank balance sheets during the financial crisis. BNP Paribas, HSBC and Commerzbank posted the largest increases in this category.

As simplicity in the European banking system increases, so does interconnectivity. Intra-financial system liabilities, a term that covers deposits made by financial institutions, marketable securities issued by banks, net repurchase agreements and net securities borrowing between banks, and net OTC derivatives between financial institutions increased by 10.5%. With intra-financial assets staying roughly flat, the ratio between the two increased from 1.04 to 1.11, which means that these top banks are increasingly funding themselves externally either through smaller lenders or the shadow banking system.  

Individual performance

In terms of total exposure, which has grown overall among the 37 lenders, HSBC remains top dog with an increase from €2410bn to €2680bn. BNP Paribas follows close behind, expanding its total exposures from €2030bn to €2250bn, while Barclays is third despite a slight drop in its exposures from €1960bn to €1940bn.

HSBC is the largest custodian of assets and the main underwriter of debt and equity, making it one of the top players in the infrastructure of the financial system. It also has the largest global footprint of the banks surveyed, holding €1280bn in cross-jurisdictional claims and €1250bn in cross-jurisdictional liabilities, and has more outstanding securities than any other institution.

37 largest EU banks-interconnectedness 2014

As far as intra-financial assets are concerned, Barclays leads the way with €281.6bn, while BNP Paribas is out in front where intra-financial liabilities are concerned, holding €418.5bn. HSBC ranks second in both categories with €275.98bn and €328.87bn, respectively.

In terms of trading and AFS securities, BNP Paribas leads the field with €206.94bn, followed by Barclays with €112.86bn and Société Générale at €108.46bn. Deutsche Bank comes fourth with €70.2bn worth of these assets. Of these four banks, only BNP Paribas actually increased its holdings of trading and AFS securities in the 2013 to 2014 period.

Deutsche Bank emerges as the largest holder of OTC derivatives among the surveyed banks, with a notional value of €47,270bn on its books. While OTC derivatives’ notional values dwindled at many institutions, Lloyds Banking Group took a step in the opposite direction, increasing its holdings of these assets by €3050bn, a 48.54% addition to the previous total. However, given the diminutive size of the investment division at this bank, these instruments are most likely intended to hedge its retail and wholesale activity, rather than provide derivatives liquidity to clients or act as proprietary positions.

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