One bank in Asia has cut credit lines to major French lenders while five other banks in Asia are reviewing trades and counterparty risk as worries about the exposure of French banks to peripheral euro zone debt mounts, banking sources told Reuters on Thursday.
Rumors on Wednesday that France was to lose its AAA rating, later denied by ratings agencies, helped trigger the biggest widening in the European credit default swap index since the credit crunch in 2008.
That sudden rise in risk perception, combined with sharp share price falls in French banks, prompted some banks in Asia to speed up reviews of counterparty risk and look at whether they should cut exposure to European lenders, sources at each of the six banks in Asia said.
Contacted about the moves by the banks in Asia, a spokeswoman for top French lender BNP Paribas (BNPP.PA) in Paris said: "We never comment on market rumors."
Societe Generale (SOGN.PA) had no immediate comment to make while a spokeswoman for Credit Agricole (CAGR.PA), which will publish its second-quarter earnings later in August, said the bank would not make any comment.
The banks in Asia and the sources -- a mix of risk officers, senior traders and loan bankers -- could not be identified because of the sensitive nature of the information.
The head of treasury risk management for Asia at one bank in Singapore -- which has a significant presence across the region -- said their credit lines to large French banks had been cut because of the perceived risks in lending to these counterparties.
"We've cut. The limits have been removed from the system. They have to seek approval on a case-by-case basis," the treasury risk official said. The official declined to name the French banks.
Societe Generale put out a statement on Wednesday denying rumors about its financial health after its shares fell by as much as 21 percent.
The statement failed to fend off much of the market's concern with its shares ending the day 15 percent lower, taking losses since early July to more than 50 percent.
A senior credit trader in Singapore said that when a bank's shares fall that sharply their risk officer will automatically look at how much exposure they have to that lender.
SocGen shares were down 4 percent by 6:30 a.m. EDT on Thursday. BNP was down 5 percent while Credit Agricole (CAGR.PA) was largely flat.
Banks' heightened responses could exacerbate the market strains if they all acted simultaneously with portfolio-at-risk modeling, analysts said.
"The thing is if they all use it at the same time they will all sell at the same time when risk goes up, and that will drive prices down and it is like a snowball because then the prices go down and then your value-at-risk ratio will tell you 'oh, I must reduce my risk even more'," said Mark Matthews, head of research at Julius Baer.
Several of the traders and bankers in Asia said that while they had not cut all exposure to any particular institution, they were very cautious about taking on new trading positions with them.
A senior risk officer at a bank in Singapore said "obviously we are having a review," when asked if they were reassessing their positions with European counterparties.
Bankers and risk officers at the five institutions in Asia that were still dealing with French banks said that while short-term lending of up to 30 days was still taking place, they were conducting a thorough review of longer-term credit lines regardless of the type of transaction.
"It's all in relation to (our) take on a French bank's credit risk, regardless of whether it's a swap or interbank lending transaction," said a senior loan banker at a Japanese bank.
Criteria banks are reviewing include looking at whether parts of the credit lines they have in place with their French financial counterparties are as yet unused, and if so if they can be reduced. The term lengths of loans they've granted are also under review, with a view to cutting them if they can.
Lenders are also considering imposing a larger haircut on the European government bonds posted as collateral by the euro zone banks they lend to, the treasury risk official from the bank that has cut credit lines said.
These practices already look to be constraining European lenders' access to longer term funds, given that banks had to tap the European Central bank for 50 billion euros worth of six-month cash this week.
"They went on (credit) watch late last week for us. We can't extend further counterparty risk on French banks," said a senior trader at another financial institution in Singapore.
The restrictions, put in place on Friday, limited trading across financial asset classes that would increase the institution's exposure to the French banks, the senior trader said.
A compliance officer at another European bank in Singapore said banks are responding to changes in the risk outlook much more quickly than during the 2008 financial crisis.
"We have a dedicated unit not just going through our exposures on a name by name basis but looking at the broad portfolio of assets the whole bank is exposed to and the risks it contains," he said.
"People are flagging much earlier if they think there's counterparty risk we need to reassess."
Chris Matten, a financial services partner at PricewaterhouseCoopers in Singapore and a former CFO of OCBC Bank (OCBC.SI), said reviews of European lenders would have been happening regularly.
"The smarter banks would have gone through the exercise a while ago. We've seen sharp falls in shares this week but the debt problems in the euro zone have been a train crash in slow motion," Matten told Reuters.
"I know of at least a few smart banks that went through all their exposure to south European banks six months ago and have since cut that exposure quite substantially."