Bank losses from SNB shock seen mounting as ripples spread

[ZURICH] The US$400 million of cumulative losses that Citigroup Inc, Deutsche Bank AG and Barclays Plc are said to have suffered from the Swiss central bank's decision to end the cap on the franc may be followed by others in coming days.

"The losses will be in the billions - they are still being tallied," said Mark Williams, an executive-in- residence at Boston University specializing in risk management. "They will range from large banks, brokers, hedge funds, mutual funds to currency speculators. There will be ripple effects throughout the financial system."

Citigroup, the world's biggest currencies dealer, lost more than US$150 million at its trading desks, a person with knowledge of the matter said last week. Deutsche Bank lost US$150 million and Barclays less than US$100 million, people familiar with the events said, after the Swiss National Bank scrapped a three- year-old policy of capping its currency against the euro and the franc soared as much as 41 per cent that day versus the euro. Spokesmen for the three banks declined to comment.

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging-market debt crises, is closing his largest hedge fund, which had about US$830 million in assets at the end of the year, after losing virtually all its money on the SNB's decision, a person familiar with the firm said last week.

Popular Trade FXCM Inc, the largest US retail foreign-exchange broker, got a US$300 million cash infusion from Leucadia National Corp after warning that client losses threatened its compliance with capital rules. FXCM, which handled US$1.4 trillion of trades for individuals last quarter, said it was owed US$225 million by customers.

The SNB's move "shocked people all over the world," Timothy Massad, chairman of the US Commodity Futures Trading Commission, said in an interview in Hong Kong. The regulator is "continuously" monitoring the situation, he said.

Shorting the franc was a popular trade and most firms would leverage their positions some 20 times or more, said Mr Williams, who consults for hedge funds. With such leverage a 5 per cent move against the position wipes out all the value, yet the trades were seen as relatively low-risk by models used by financial institutions because volatility of the franc was reduced by the SNB's cap, he said.

Citigroup had reported an average total trading value-at-risk, a measure of how much the company could lose in trading in one day, of US$105 million in the third quarter, of which US$32 million was attributed to foreign-exchange risks. Deutsche Bank's stressed value-at-risk, which measures possible daily losses in market turmoil, averaged 109 million euros (US$126 million) in the first nine months, with 27 million euros related to foreign-exchange risks.

"The banks' losses aren't large but what it does show is that they are still gambling by taking positions," said Gordon Kerr, a former banker and consultant at London-based Cobden Partners, an adviser to governments. "Brokers that lost money will worry about being shunned by clients, which might pull liquidity."

Banks may also suffer because of prime brokerage services, which include activities such as securities lending, trade execution and cash management for hedge funds.

Citigroup's losses aren't tied to its relationships with FXCM and other retail trading platforms, the person, who asked not to be identified because the information hasn't been disclosed publicly, said last week.

Swiss banks, which haven't announced any losses so far, will probably also suffer in the longer term, said Arturo Bris, a professor at the Lausanne-based IMD business school.

"The negative effects for the Swiss banks come in two ways," Mr Bris said. "First, it will reduce the flow of assets from the outside and will encourage the exit of Swiss money to other countries. Secondly, they will be hurt by the negative impact on the Swiss economy."

Julius Baer Group Ltd, Switzerland's third-largest wealth manager, said it plans to take "appropriate measures to defend the group's profitability" from the stronger franc. The bank didn't suffer losses on the two trading days following SNB decision, the Zurich-based lender said in a statement.

The SNB's move may have negative consequences for the credit ratings of Swiss banks and asset managers because it puts pressure on their profitability and asset quality, Moody's Investors Service Ltd said. It may also hurt Polish and Austrian banks that have provided loans in francs, it said.

Pain from wrong-way bets may not be limited to just the financial industry.

"We're just hearing about financial institutions now," Philip Guarco, global head of fixed-income strategy at JPMorgan Private Bank, said in an interview on Bloomberg Television.

"Remember what happened back in 2009, when the dollar rallied? You actually had major corporates in Mexico and Brazil, where the treasury departments were taking positions in FX. So we haven't heard the end of it yet."

BLOOMBERG