Untangling the Banking Web: The US & EU banking system

Structure of the EU and US banking system: Federal Reserve closely monitors the large banks, the
level of central supervision diminishes with the size of the banks. In the Euro Area, the ECB supervises
significant banks directly and less significant banks through national entities

Where and What are “significant banks” in the EU? Significant banks are defined by the banks’ asset
size, economic importance, funding and cross border activities. The EU has 111 significant banks, with
majority of these present in Germany. Non-significant banks constitute ~18% of EU’s banking sector
assets.

The interlinkages and risk of contagion for EU banks: The level of interconnectedness within EU
banks is relatively low and markets are segmented in the euro area. Euro area banks appear to have
few but sizeable exposures towards Chinese banks, many but relatively small exposures to Swiss
banks, and many and sizeable exposures to US and UK banks (ECB).

Trouble with financial instruments (AT1 & CoCo bonds) – Going out of style? The loss of confidence
in these instruments after the UBS-Credit Suisse takeover raises the possibility that the AT1 and CoCo
bond market might find it difficult to recover in the future.

European banks have sufficient liquidity, primarily in cash and reserves

The write down of Credit Suisse AT1 bonds to zero is being viewed negatively globally, causing a fall
in the AT1 bond market
 Size of the AT1 bond market -- $250bn globally
 This is estimated to include $100bn in the dollar market and $70 bn in the euro market.
 The size of this market is small in comparison to the total market of investment grade bonds
($10 trillion in the US and EU combined) and a contagion to the broader market therefore
might be limited.
 However, the loss of confidence in these instruments raises the possibility that the AT1 and
CoCo bond market might find it difficult to recover in the future.

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