Threat to Big Banks Starts from Corporate Liquidity Crisis Coming Into Focus

Sept. 9, 2022 (EIRNS)—The very rapid rise of global corporate debt since 2017—from $60 trillion to $85 trillion according to Federal Reserve data—points to the potential of a banking and financial system crisis underlying the current apparent liquidity crisis of energy and commodity producing and trading companies. In short, the bailouts now being thrown at the big corporations in Europe may soon be needed by the banks.

A Bloomberg News article this morning, headlined “ECB Ramps Up Scrutiny of Banks’ Response to Energy Crisis,” reported on the first step: The European Central Bank reaching out to the megabanks of London, Paris and Frankfurt to ask, “You don’t have any corporate debt default problems, do you?”

As Bloomberg put it:

“The European Central Bank is intensifying discussions with bank executives over their readiness for a potential surge in company defaults and a drying-up of energy-market liquidity, amid the worsening stand-off over Russian gas supplies. The Frankfurt-based bank watchdog wrote to lenders last month, telling them to analyze the impact of a gas stoppage on their businesses, according to people familiar with the matter. [Banks’] responses are due in mid-September, and follow-up conversations are to come by the end of this month, said the people, who asked to remain anonymous as the interaction isn’t public.... Regulators are pushing banks to ensure they have sufficient reserves for loan defaults by identifying their most-exposed clients as well as the effect on companies that aren’t directly affected by the fallout from Russia’s invasion of Ukraine.”

According to Bloomberg the ECB further inquired about energy and commodity derivatives exposure, “though this is limited to a smaller number of banks”—of course, only to the very biggest and most interconnected ones. The megabanks are the counterparties of the affected big companies both in the latter’s margin loans (subject of the liquidity crisis right now), and their derivatives exposure. Executives of JPMorgan Chase were publicly apprehensive about this already in March, and the margin calls are much bigger now.