Eurex Margin Call Said to Trigger Near-Collapse of German Bank
(Bloomberg) -- The near-collapse of Duesseldorfer Hypothekenbank AG, the German lender hit by Heta Asset Resolution AG’s debt moratorium, was prompted in part by a margin call from Eurex, people familiar with the matter said.
Eurex, Europe’s largest derivatives market, asked DuessHyp to post additional collateral as the German bank faced writing down its 348 million euros ($375 million) of bonds issued by Austria’s Heta, said the people.
The hit to the bank’s capital from the Heta losses and the extra posting of margin forced the lender, laden with swaps, to seek a rescue, said the people. The Association of German Banks, or BdB, on March 15 said it would back DuessHyp, a lender to public entities, and a day later agreed to buy the company from U.S. private equity firm Lone Star Funds.
The repercussions of winding down Heta, a bad bank that became the first institution to be resolved under new European Union rules for bank failures, are an example of how one firm’s collapse can spread across the region. German and Austrian banks’ finances have been damaged by Heta while investors reassess the risk on 1.3 trillion euros of state-guaranteed debt in the euro area.
A margin call is a demand on an investor to deposit additional funds with a broker or clearinghouse after the value of its trading position falls below a predetermined point.
BdB spokesman Lars Hofer and DuessHyp spokeswoman Barbara Hugo-Dilworth declined to comment. Frank Herkenhoff, a spokesman for Deutsche Boerse AG, which owns Eurex, also declined to comment.
DuessHyp’s trouble began when Austrian regulators ordered a debt moratorium on Heta March 1, forcing the bank to consider writing down the bond holding that exceeded the bank’s 233 million euros of core capital as of June 30. BdB stepped in to rescue the lender two weeks later.
DuessHyp held swaps with a notional value of 13.8 billion euros as of June 30, after cutting the holdings from 17.6 billion euros at the end of 2013, according to its half-year report. The lender had interest-rate swaps with a notional value of 13.3 billion euros, while cross-currency swaps amounted to 500 million euros, both used to hedge risks, it said, without providing details on its counterparties.
“The derivative portfolio is bigger than the total assets, which is pretty significant and unusual for a bank with such a simple business model,” said Patrick Rioual, a credit analyst at Fitch Ratings. “This is mostly a legacy from the past, because before the crisis they underwrote all sorts of assets from different countries and in different currencies and they used swaps to hedge the risks.”
Because 6.4 billion euros of the bank’s assets are loans to public entities, they are deemed risk-free according to international banking rules. That lowered the bank’s risk- weighted assets to 2 billion euros and left the bank with a regulatory capital ratio of 11.6 percent, above the minimum set by regulators.
“In case it would have been needed, that in my view was the last wake-up call to all regulators around the globe to not consider sovereign debt as risk free,” Felix Hufeld, president of German financial regulator BaFin, said in London on March 25.
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