According to the BIS statistical annex, US and UK banks increased their potential exposure (consisting mostly of credit derivatives) to banks in Eurozone periphery such as Portugal and Spain, in 2011, even as most international banks reduced their overall direct exposure.
Portuguese and Spanish banks lost -15.9% and -17.2% of their direct interbank funding in 2011, which dropped to USD 170 Bln and USD 586 Bln respectively, as international banks took advantage of the emergency liquidity provided by the ECB to cut their cross-border lending.
But, in contrast to Greece and Ireland, the indirect or potential exposure increased +10.6% to USD 102.9 Bln to Portuguese banks and +24.1% to USD 346 Bln to Spanish banks.
More than half of this "potential exposure", consisting mostly of CDS credit derivatives and other forms of guarantees, is concentrated in US banks which increased their involvement sharply in 2011, mostly with Spain, even as credit default swap pricing jumped.
If we assume that this "potential exposure" is not speculative but serves to backstop direct credit exposure, then the concentration of exposure in US banks increased from 22.8% to 34.7% in the case of Portugal and from 25.2% to 38.9% in the case of Spain , "among responding banks from 24 countries".
It is important to note that this increase in "potential exposure" represents only a tentative re-allocation of credit risk among creditors and guarantors, and that it generates no new credit availability for these distressed economies. Being outside the Eurozone, UK and US creditors had already been spared by not having to contribute to the European bailout pots.
One might say that the CDS credit insutance industry even faced issues of credibility, as they collected huge fees but hardly ever had to pay out. The presence of so-called guarantors increases the risk of moral hazard and greatly complicates the necessary orderly debt workout.
Will they or won't they pay? "Show me the money", one might say.
The fact that the buyers bought more credit protection in 2011, even as swap prices rose, indicates that they believed that future haircuts might no longer be as "voluntary" as in the past, and thus that CDS may actually come to represent value-for-money as triggers take effect.
Mariana Abrantes de Sousa
Sources: BIS quarterly statistical annexes, http://www.bis.org/publ/qtrpdf/r_qa1106.pdf, http://www.bis.org/publ/qtrpdf/r_qa1206.pdf
...direct bank exposures in 2010 as reported to the BIS http://ppplusofonia.blogspot.pt/2011/12/eurozone-crisis-tests-limits-of.html
US banks sold more swaps on European debt as risks and prices rose http://www.bloomberg.com/news/2012-05-17/u-s-banks-sold-more-swaps-on-european-debt-as-risks-rose.html
Banca europeia retira da periferia http://www.ionline.pt/dinheiro/banca-europeia-retira-753-mil-milhoes-dos-paises-da-periferia
Eurozone woes are US woes http://www.bbc.co.uk/news/business-13663002
Gran banca europea saca dinero de España http://www.cincodias.com/articulo/mercados/gran-banca-europea-saca-dinero-espana-grecia-durante-crisis/20120619cdscdsmer_12/
Obama preocupado ...miles de millones en derivados ...http://www.cincodias.com/articulo/mercados/bancos-alemania-francia-juegan-730000-millones-espana-italia/20120614cdscdsmer_13/
Bundesbank TARGET2 credit balances keep rising as capital flight is fed by concerns over Euro convertibility, pointing to the need for EU Deposit Guarantee Scheme http://ppplusofonia.blogspot.pt/2012/05/eu-wide-deposit-gurantees-now.html