OFR_2016_Financial-Stability-Report

could. In early 2016, investor concerns focused on European banks’ earnings
and loan quality. Further weaknesses in European banks could have
repercussions on U.S. financial stability and the economy (see Risks for
European Banks Remain High).
In this section, we consider how potential spillovers from Europe could
affect U.S. banks, insurers, asset managers, and money market funds. Due
to the magnitude of both direct and indirect exposures, the potential impact
of more disruptions in Europe on U.S. financial stability is high. The probability
is difficult to judge, although it seems likely that uncertainty will persist
for some time. The immediacy of the issue is moderate. It is unclear how
prepared regulators and firms are for further disruptions, especially given
the unprecedented nature of a country voting to exit the EU after 43 years
of membership. U.S. supervisors should continue to monitor and stress test
financial exposures.
Figure 21. Total Exposures of U.S. G-SIBs to the EU
($ billions)
Off-balance-sheet items are a significant portion of U.S.
G-SIB exposure to the European Union
Cross-border claims
Claims on local residents
Fair value of derivatives
Unused commitments
Guarantees
Credit derivatives sold
On-balance-sheet items
Off-balance-sheet items
0 200 400 600 800 1000
Note: Data as of June 30, 2016. G-SIB stands for global
systemically important bank. Claims are on an ultimate risk basis
and include the reallocation of claims such as risk transfers.
Croatia, Estonia, Latvia, Lithuania, Malta, and Slovenia are not
represented in this sample.
Sources: Federal Financial Institutions Examination Council, OFR
analysis
U.S. Financial Institutions Have Large
Direct Exposures to Europe
Banks. U.S. global systemically important banks
(G-SIBs) have more than $2 trillion in total exposures
to Europe (see Figure 21). Roughly half of those exposures
are off-balance-sheet. Under stress, U.S. G-SIBs’
unused commitments could be drawn, straining the
liquidity and capital of these firms. U.S. G-SIBs have
sold more than $800 billion notional in credit derivatives
referencing entities domiciled in the EU.
The Brexit vote raised locational and supervisory
risks for large internationally active banks. It has
led many banks to consider moving operations out of
London. The alternatives are unclear and possibly more
expensive.
Insurance companies. U.S. insurance companies are
exposed to the EU through investments, derivatives,
and reinsurance. The top 10 U.S. life insurers have $32
billion of investment exposure to Europe, excluding the
United Kingdom.
Gross notional derivatives exposure to EU banks
totaled $311 billion for the top 10 U.S. life insurers
at the end of 2015. Notional exposures may overstate
the potential risks of derivatives. But data on notional
exposures also may understate U.S. insurers’ links to
European banks. For example, American International
Group, Inc. (AIG) and Prudential use noninsurance
24 2016 | OFR Financial Stability Report