DERIVATIVES: Bank downgrades trigger billions in collateral calls

PROOF POSITIVE that  The End Has Begun

(International Financing Review)  6/30/2012  A series of ratings downgrades from Moody’s last week has created an unwelcome but manageable liquidity squeeze on three major banks, by forcing them to post billions of dollars in additional collateral against derivatives exposures.

Moody’s completed its rating review of international banks last Thursday and downgraded three major derivatives dealers below the crucial Single A threshold, which will likely have led to hefty collateral calls from counterparties.

Citigroup’s two-notch long-term rating downgrade from A3 to Baa2 could have led to US$500m in additional liquidity and funding demands due to derivative triggers and exchange margin requirements, according to the bank’s 10Q regulatory filing at the end of the first quarter. 

Morgan Stanley – which Moody’s downgraded from A2 to Baa1 – said a two-notch downgrade from both Moody’s and Standard and Poor’s could spur an additional US$6.8bn of collateral requirements in its latest 10Q. The bank did not break down its potential collateral calls under a scenario where only Moody’s downgraded the bank below the Single A threshold.

Royal Bank of Scotland estimated it may have to post £9bn of collateral as a result of the one-notch Moody’s downgrade to Baa1 in a statement on June 21, but did not detail how much of this additional requirement was driven by margin for swaps exposures.

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My Thoughts: Remember, these collateralization burdens imposed by the downgrades are _IN ADDITION TO_ all of the other difficulties which the banking sector is already drowning in – and this is not the last round of downgrades… look for more in the fall.  Everything is being brought to a simultaneous head, and it looks to be in September.


~Those who abuse Liberty, do so at their own peril!

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