Banks’ Exposures To Russia Are Much More Transparent Than That Of Non-Banks

Remember Long Term Capital Management and AIG? I sure do. LTCM imploded in 1998, in large part, because of its investments in Russian treasuries and other emerging market securities. In 2008, AIG Russia almost declared bankruptcy because a unit in London, that barely anyone knew about, was selling protection, through credit default swaps, to banks who were protecting against defaults on securitizations. Why does this walk down memory lane matter? Because here we are in 2022, and sadly, we are still in a situation where there is tremendous opacity in the global financial system. If it were just rich investors losing money, the vast amount of the global population would hardly lose sleep. However, when financial institutions lose money, they invariably impact unsuspecting citizens.

Multiple international standard setters such as the Financial Stability Board and the Bank for International Settlements have long warned that Other Financial Institutions (OFIs), also known as non-banks and shadow financial institutions, need to be regulated and supervised. Many of them are not. Yes, the largest ones are often publicly traded, so they have financial disclosures, but that does not mean that they are supervised and examined with a risk based supervisory approach in the manner that banks and insurance companies are.

Financial Institutions Are Interconnected With Russia and With Each Other

Russia’s invasion of Ukraine has shed light on the interconnections of financial institutions and Russia. Unfortunately, these interconnections are a reminder of the tremendous opacity that still exists in the financial industry, even after the lessons that we should have learned in 2008.

Banks’ credit and market exposures are much easier to understand because how they are regulated means that there is much more information that they have to disclose. The problem, however, is that since a huge swath of the global financial sector is not regulated like banks are, the full extent of the financial industry’s credit and market exposures to Russia is unknown. A wide range of asset managers, hedge funds, home offices, insurance companies, pension funds, sovereign wealth funds, and university endowment funds have investments in Russian financial assets, that is, bonds, stocks, commodities, loans, and the ruble.

Banks

Goldman Sachs, J.P. Morgan, Commerzbank, and grudgingly, even Deutsche Bank, have announced that they are exiting Russia. Exiting will take time, and no doubt, it will be a complicated endeavor. Leaving Russia does not necessarily mean that these banks will automatically stop lending to entities in or citizens of Russia or that they will stop trading Russian bonds, foreign currencies or commodities. Further pressure from different stakeholders, especially those who want these banks to comply with global environmental, social, and governance standards (ESG), will no doubt continue to influence bank executives’ decisions.

Fortunately, foreign banks exposure to Russian residents, financial institutions and companies is relatively small in comparison to their total banking assets. Basel III capital and liquidity standards, adopted as requirements in over 30 countries also means that banks are in far better shape to sustain unexpected losses than they were back in the mid-2000s. Bank for International Settlements data shows that the countries, which banks have the largest exposures are Italy, France, Austria, and the U.S. The banks with the largest exposures to Russia are Raiffeisen Bank International ($25bn), Société Générale ($21bn), Citibank ($10bn), Unicredit ($8.1bn), Credit Agricole ($7.3), Intesa Sao Paulo ($6.1bn), ING ($4.9), BNP Paribas ($3.3), Deutsche Bank ($1.5bn), and Credit Suisse ($1.1bn). These banks, especially the European ones, are the most likely to be adversely impacted if the Russian invasion intensifies.

American banks’ exposure to Russia represents less than 1% of the almost $17 trillion banking assets. Unsurprisingly, U.S. banks overwhelmingly largest exposures are to American residents, financial institutions and corporations. Their largest exposures to foreign advanced economies, as they long have been, are to the United Kingdom ($642bn), Cayman Islands ($572bn), Japan ($491bn), Germany ($403bn), and France ($327 bn). US banks’ largest exposures to emerging market economies are to China ($139bn), Mexico ($105 ), South Korea ($121bn), Brazil ($89bn), and India ($78bn).

Insurance and Reinsurance

The U.S. insurance and reinsurance sector has small credit exposure to Russia. The U.S. insurance and reinsurance sector had about $2 billion in Russian corporate and sovereign bonds. According to AM Best, they have very little in exposure to Russian stocks. Because U.S. insurers are interconnected to companies, which themselves have earnings that rely on Russia, if the conflict intensifies and is more prolonged, there could be an impact on U.S. insurance companies.

Other Financial Institutions (OFIs)

U.S. asset managers have far more significant exposures to Russia than do U.S. banks. What is harder to see is how much pension funds and other investors own in the asset managers’ funds. Capital Group, Blackrock and Vanguard manage the funds with the largest exposures to Russia; other significant asset managers exposed to Russia are Fidelity, Invesco, and Schwab.

The value of Blackrock’s Russian assets have recently plummeted by 94% from $18 billion. And Pimco Investment Management will also take a big hit in its Russian government exposure, formerly valued at $1.14 bn; Pimco also is a seller of protection of $942 million credit default swaps. With the imminent Russian default, Pimco will have to honor those CDS protection payments.

U.S. public pension plans’ exposures to Russia are starting to trickle out. Pension plans are invested in Russian bonds and stocks directly or through asset managers’ investment funds. CalPERS fund has $900 million in Russia exposure, while CalSTRS has approximately $800 million. The Pennsylvania Public School Employees Retirement has an exposure of $300 million. The Virginia Retirement Systems, the New York State Retirement System, and the Washington State Investment Board each have over $100 million in exposures to Russia. North Carolina has less of an exposure, at $80 million. Each U.S. state usually has at least two large pension funds, and countless municipalities have pension funds at the local level. Los Angeles County Employees, San Jose Police and Fire Fund, and New York City Police Pension Fund have recently announced efforts to divest of their Russian investments valued at about $226 million.

If anyone can provide me data with the total Russian exposures of hedge funds, home offices, pension funds, private equity, and sovereign wealth funds, I certainly would be appreciative. The reason we should all care is because these financial institutions are very interconnected to banks, insurance companies and asset managers. For the sake of ordinary Americans, we really should avoid LTCM and AIG surprises.

Recent articles by this author are below, and her other Forbes publications are here:

Banks Investing In Russia Cannot Cloak Themselves in the ESG Mantle

Imminent Russian Defaults Will Lead To An Economic Crisis Worse Thank In 1998

The Bank of Russia is Desperately Trying to Prevent a Run on Banks

From Ruble to Rubble

Rodríguez Valladares Testified On Climate As A Systemic Risk To The Financial System

Rising Sea Levels Pose Increasing Credit Risks for Many US Coastal States

Credit Quality of Oil and Gas Loans has Improved Significantly

Emerging Market Borrowing is Breaking Records

Financial Stability Board Finds That Non-Banks’ Resilience Needs Strengthening