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16 March 2022

SSM: Invasion of Ukraine: euro area banks so far resilient to a second exogenous shock

The invasion of Ukraine reversed a steady improvement in investors’ stance on EU banks

Prior to the geo-political shock, investors were positive on
• upside linked to reversal of provisions and gradual normalisation of
interest rate environment
• aggregate banks’ profit projections above pre-COVID levels until 2023
• some lenders projecting medium-term double-digit return on equity, to
levels at or above cost of equity.

Since escalation of the conflict, markets have been pricing in
uncertainty over sanctions, extent of exposure, and macro
• Direct exposures to Russian counterparts, including:
• Towards sanctioned entities
• Cross-border loans
• Euro area-owned subsidiaries in Russia
• Direct Russian links in euro area: Russian subsidiaries
• Indirect exposures and financial markets volatility (commodities)
• Russian-sovereign default scenario?
• Operational risk: cyberattacks, IT connections to Russia/Ukraine
• Macro impact: revised GDP growth and price inflation

Direct exposures to Russia are manageable overall

Exposures of euro area banks to credit, securities and
derivatives appear contained
• Russian economic downturn likely to cause asset quality
deterioration and credit valuation adjustments.
• Institutions are reducing exposures and unwinding positions.
Operational hiccups due to sanctions (e.g. asset freezes, exclusion
from SWIFT) contained so far.
Source: COREP, Q3 2021 data.

Interest rate derivative
Even extreme “walk-away” scenarios from subsidiaries in
Russia owned by significant institutions seem manageable given
the currently solid group capital position
• In light of sanctions and Russian retaliation, market intelligence is
not ruling out the possibility of “walk-away” scenarios.
• Limited intra-group funding at risk, as most establishments are
locally funded;
• Equity in subsidiaries would be at stake.
Impact from Russian links so far contained
• Sanctions and potential Russian retaliation can put pressure on EU
establishments of Russian groups (e.g. Sberbank AG) or raise
counterparty/correspondent banking concerns..

full presentation at  SSM

© ECB - European Central Bank

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