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Intesa Drives Europe Bank Rise in Holding of Italy Swaps

October 05, 2012

Intesa Sanpaolo SpA (ISP)’s derivative contracts with the Italian government almost quadrupled in value during the first half of 2012, driving European banks’ growing swap exposure to the euro region’s second-most-indebted nation.

The increase comes at a time when U.S. banks have been reducing derivative positions with Italy, according to filings compiled by Bloomberg Brief: Risk Newsletter.

Intesa, which is based in Milan, had contracts with Italy worth 3.9 billion euros ($5 billion) as of June 30, up from 1 billion euros at the end of 2011, data from the European Banking Authority show. Deutsche Bank AG (DBK) had 2.5 billion euros, BNP Paribas SA (BNP) 2.3 billion euros and UniCredit SpA (UCG) 1.5 billion euros, according to EBA stress test results published on Oct. 3.

The four European banks had 10.1 billion euros in combined derivatives exposure to the Italian state on June 30. By contrast, the four U.S. banks with the largest swap holdings reduced their combined derivative counterparty exposure to Italy by $2.7 billion to a total of $3.5 billion, according to second- quarter filings by Morgan Stanley (MS:US), Goldman Sachs Group Inc. (GS:US), JPMorgan Chase & Co. (JPM:US) and Bank of America Corp. (BAC:US)

“The nexus between banks and sovereigns isn’t weakening as policy makers had desired,” said Alberto Gallo, head of European credit research at Royal Bank of Scotland Group Plc in London. “Markets are becoming more localized and banks more exposed to governments’ funding costs, affecting lending.”

The majority of the U.S. reduction came from so-called netting hedges, such as credit-default swaps, that offset the total.

Largest Exposure

Intesa, Italy’s second-biggest bank, held 71.4 billion euros of Italian sovereign debt as of June 30, the most among banks covered by the EBA data. According to Gallo, Intesa increased its holding of Italian debt in relation to total assets in the period.

An Intesa official declined to comment, while BNP and Unicredit didn’t respond to requests seeking comment. Deutsche Bank declined to comment beyond the published figures. An official for Italy’s Treasury in Rome declined to comment.

European banks have used part of the European Central Bank’s 1 trillion euros of three-year loans to invest in government securities, particularly in Spain and Italy.

The European data show an increase of 2.7 billion euros for the four banks since the last stress-test results at the end of December. Dexia SA (DEXB) had been one of the five largest bank holders of Italian swaps last year, and was not included in the latest stress test since it was nationalized by Belgium at the end of last year.

Unwinding Bets

Overall, European banks’ direct exposure to Italy stood at 10.9 billion euros, the largest positive amount for any European country included in the test.

Governments enter into interest-rate derivative trades with banks to reduce borrowing costs and guard against volatility. As the European sovereign-debt crisis worsened and Italian bond prices plunged, U.S. banks cut back on their derivative positions with the nation.

In January, Italy paid Morgan Stanley $3.4 billion to unwind interest-rate derivative bets that went sour, helping the bank reduce its exposure to the country.

Direct sovereign exposure figures reported by the EBA refer only to derivative contracts between the banks and sovereign entities, including central and local government counterparties. State-backed companies are included. Separate data for indirect exposure to Italy through contracts such as credit-default swaps with other banks was also provided, showing much lower exposure.

Creditworthiness Perception

The Italian government held derivatives on about 160 billion euros of debt, Education Undersecretary Marco Rossi Doria told the nation’s Parliament on March 15. The majority of the swaps, with notional value of about 100 billion euros, were interest-rate swap contracts. The disclosures by the EBA and banks refer to the fair value of derivatives with Italy, not the notional amounts.

The market perception of Italy’s creditworthiness has improved since the last EBA stress test was carried out, after the European Central Bank rolled out plans to increase purchases of euro-area government bonds. Italy’s five-year CDS have become 146 basis points cheaper since the stress test was conducted.

To contact the reporter on this story: Radi Khasawneh in London at

To contact the editors responsible for this story: Nicholas Dunbar at; Edward Evans at

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