Just as the European banking sector started to see some attractive tail winds pushing it along, the first since the crisis in 2008, Europe is now on the brink of war.
Can Europe’s banks cope with the fallout from Russian sanctions?
European banks are bracing for the fallout from fresh global sanctions as the Ukraine crisis escalates, although US bank executives say they expected their industry to be insulated from major disruption after pulling back from Russia in recent years.
Europe’s banks – particularly those in Austria, Italy and France – are the world’s most exposed to Russia, and for weeks have been on high alert should governments impose new sanctions against the country.
HSBC warned of market contagion and Austria’s Raiffeisen Bank International (RBI) said it was preparing “crisis plans.”
Brief Overview of Sanctions
Britain was the first to move in retaliation for Russia recognising two breakaway regions of Ukraine and sending troops. Britain hit five banks and three individuals, a relatively mild package, that Prime Minister Boris Johnson said allowed him to “reserve further powerful sanctions” for whatever “Putin may do next”.
The European Union also agreed sanctions that will blacklist more politicians, lawmakers and officials, ban EU investors from trading in Russian state bonds, and target imports and exports with separatist entities.
“This package of sanctions… will hurt Russia, and it will hurt a lot,” the EU’s foreign policy chief Josep Borrell told a news conference.
German Chancellor Olaf Scholz said he was halting the certification of the Nord Stream 2 gas pipeline, an important future energy source for Europe’s largest economy.
Then on Tuesday afternoon US President Joe Biden announced sanctions targeting two Russian banks, the country’s sovereign debt, and Russian elites and family members, and warned that Russia would pay an even steeper price if it continued its aggression.
Potential Impact on Banks
Since Russia’s annexation of Crimea in 2014, the US and EU have blacklisted specific individuals, sought to limit Russia’s state-owned financial institutions’ access to Western capital markets, and imposed bans on weapons trade and other limits on the trade of technology, such as that for the oil sector.
That caused banks, particularly in the US, to reduce their exposure to Russia, making some bankers less concerned about the threat of sanctions on their business and more focused on the market impact of geopolitical tensions.
The boss of HSBC, one of Europe’s largest banks, said “wider contagion” for global markets was a concern, even if the bank’s direct exposure was limited.
“It’s clear that there is a likelihood of contagion or some second-order effect, but it will depend on the severity of the conflict and the severity of the retaliation if there is a conflict,” Noel Quinn told Reuters in an interview.
US banks, meanwhile, are not expecting global sanctions to have a major impact on American bank businesses or spark contagion risk, given lenders have little exposure to the Russian economy, said four executives familiar with industry thinking.
According to the Bank for International Settlements, US lenders had outstanding claims of just $14.7 billion on Russia in Q3 2021.
SWIFT payments next?
One area of potential concern is the disruption that might be created if the US decides to target Russia’s access to the SWIFT international payment network, although that is seen as unlikely in the near future.
That’s because cutting Russia off from the international payments network could seriously hurt its economy and everyday citizens and would create enormous complexity and compliance risks for the global banking industry.
RBI, which has significant operations in Russia and Ukraine, said business was now normal, but “in the event of an escalation, the crisis plans that the bank has been preparing over the past few weeks will come into effect”.
Dutch lender ING, which has a large presence in Russia, said: “A further escalating conflict could have major negative consequences.”
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