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Europe’s banks brace for Russia fallout while U.S. banks see limited pain

by jcp
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By Lawrence White, Alexandra Schwarz-Goerlich and Pete Schroeder

WASHINGTON/VIENNA/LONDON (Reuters) -European banks on Tuesday were bracing for the fallout from fresh global sanctions as the Ukraine crisis escalated, although U.S. bank executives said they expected the 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.”

Britain was the first on Tuesday 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 U.S. 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.

Since Russia’s annexation of Crimea in 2014, the United States and European Union 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 United States, 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 on Tuesday “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.

U.S. 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, U.S. lenders had outstanding claims of just $14.7 billion on Russia in the third quarter of 2021.

U.S. banks and financial industry lobby groups have held meetings with the Biden administration to discuss sanctions in recent days, three of the sources said. One said banks had spent the past 24 hours identifying who might be the potential targets of the sanctions so they could move quickly.

Another said the administration had reached out to executives in the industry before Christmas and had kept banks apprised of its thinking.

This person added that one area of potential concern was the disruption that might be created if the U.S. 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”.

Shares in the Austrian bank fell 7.48% on Tuesday.

Dutch lender ING, which has a large presence in Russia, said: “A further escalating conflict could have major negative consequences.”

One Danish pension fund said it would immediately halt new Russian investments in the wake of Putin’s move into Ukraine.

With several jurisdictions rolling out new sanctions, bankers said they hoped governments would coordinate as they drafted the fine print, in order to reduce complexity for the industry.

(Reporting by Laurence White in London, Alexandra Schwarz-Goerlich in Vienna, and Pete Schroeder in Washington; additional reporting by Iain Withers and Tommy Reggiori Wilkes in London, Toby Sterling in Amsterdam, Michelle Price and Hannah Lang in Washington, and Matt Scuffham in New York; Writing by Tom Sims; Editing by Jonathan Oatis and Rosalba O’Brien)

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