Greek Exposure in the US Banking System

Scaled properly, the US banking system's direct exposure to Greek debt is far smaller than some fear.

Headlines Thursdayraised the issue of potential US banking system exposure to Greek debt, but the facts show fears associated with this are largely overstated. (Not to mention EU leaders still have options to forestall a default.)

Currently, US banks have $1.5 billion in Greek government exposure, $5.8 billion in Greek private sector exposure and $34.0 billion in other exposure such as derivatives and other commitments—for a grand total of $41.3 billion. This is equivalent to about 0.3% of US bank assets, or about 3% of total US bank Tier 1 capital.

When compared to the six US banks with assets greater than $250 billion (those likely to hold the exposure), it is 0.7% of total assets or about 7% of total capital. So consider the following hypothetical (and very extreme) scenario:

  • If ALL (both public and private) Greek entities default (unlikely), and
  • If total US bank exposure goes to zero (also unlikely), and
  • If none of this debt exposure was hedged (again, unlikely), and
  • If all this exposure was just with the six largest US banks,

Then the banks would collectively see their $456 billion in capital fall 7%, which would reduce their collective Tier 1 capital ratio from about 11.2% to about 10.1%. While this inconceivably extreme event would impact the banks, their capitalization would remain well above the current 6% regulatory minimum deemed necessary to remain ”well capitalized” and the more stringent Basel recommendation of 8.5% (including the extra capital buffer).

Admittedly, this is not the only factor to consider when discussing the potential impact of a Greek default. The financial world is highly interconnected, and there are always other aspects (such as counterparty risk) to consider. That’s partially why the EU, IMF and ECBare as involved as they are in Greece to this day. But as it pertains to worries about the US banking system’s direct exposure to Greece, these fears seem quite overstated and disconnected from facts. As we’ve said, Greece is a valid situation to watch, but scaling can help remove fear to better assess the situation.

Six Biggest US Banks’ Total Assets vs. Greek Exposure

Sources: FDIC, 03/31/2011 and BIS, 12/2010.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.