Monday, March 30, 2020

A customer leads to a loss of $ 200 million at ABN Amro

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Cologne It is news that suggests the worst speculation by investment bankers: ABN Amro has lost $ 250 million in a very short time, as the Dutch bank announced on Thursday. After the tax deduction, there remains a loss of $ 200 million.

The blame was not on the gamble of an unattended exchange trader, but apparently speculation by a major customer that did not work: the bank had miscalculated with complex financial products, the bank explained. After the recent market crash, the customer could no longer provide the necessary collateral. ABN Amro has therefore closed its positions at a loss.

The event will also impact first quarter earnings, the release said. The news was received with concern on the stock exchange: the share fell by almost five percent by late afternoon, making it the biggest loser in the European banking index. Many investors are now probably wondering what the security of the bank’s own trading systems is.

The loss was incurred in ABN Amros clearing division. When asked by Handelsblatt, a spokesman explained the background: ABN had financed the customer in question. He speculated on US futures and warrants and deposited them with the bank as security. When their value fell sharply in the course of the stock market crash in the corona crisis, there was a “margin call”.

In the financial world, this means the obligation to make additional payments, which is demanded if the minimum coverage amount of an account is lost. The contractual obligation is actually intended to compensate for the loss of collateral deposited, for example caused by a book loss. According to the spokesman, however, the customer was unable to make the additional payment. As a result, the bank had to close its positions and sell the investments at a loss.

“Unique incident” or growing risk?

The clearing division only serves institutional customers, i.e. insurers, pension funds, hedge funds and other institutions. For these, ABN Amro handles the purchase of securities. As a clearing house, it stands between buyers and sellers, bears the risk and ensures that everything runs smoothly. In return, she receives fees. ABN Amro also provides liquidity for securities transactions: if sellers need additional money, the bank grants loans.

In the current announcement, the Dutch emphasize the uniqueness of the incident: “ABN Amro Clearing has a long track record with low credit losses.” You can always monitor customer accounts and counteract problematic positions, the spokesman added. The extreme volatility, however, has led to “severe stress and turmoil in the US markets”. As a result, the pricing mechanism no longer worked properly for some large positions.

According to financial circles, ABN Amro is unlikely to be compensated by the institutional customer. The loss should therefore clearly cloud the result of the first quarter. Inside the bank, you are alarmed and watch other customers closely. Another loss of millions cannot be completely ruled out, it is said, but very unlikely.

Experts like Volker Brühl, managing director of the Center for Financial Studies at Frankfurt University, are not so sure. “The high volatility on the financial markets in connection with the abrupt price slide in almost all asset classes can lead to further unexpected losses for financial institutions,” he warns.

The current stress situation simply makes it more likely that actors will speculate. Depending on the individual case, Brühl subsequently fears different risks for the participating institutes:

  • If loan collateral deteriorated and customers were unable to provide further collateral in the crisis, banks could be forced to terminate loans to limit their losses.
  • Losses also exist if banks act as counterparties and their risk hedging is not sufficient in the event of extreme price movements.
  • Clearing houses could also have problems: they take the risk of non-exchange-traded OTC derivatives that sellers or buyers fail. If this risk increases, the risk of loss increases for them.

“In times of crisis, extreme risks can arise that become a problem for investment banks and clearing houses,” Brühl summarizes. “How much the corona crisis will ultimately burden business will be shown by the figures for the first quarter.” Losses at other financial institutions are therefore also possible.

The ABN Amro case is particularly bitter for the Dutch taxpayer: the money house, once one of the largest banks in the world, was saved by the Dutch state in the 2009 financial crisis and subsequently shrunk significantly due to spin-offs and sales. The state still owns 56 percent of the bank. But lately the negative headlines started to pile up again.

There was a slide in the autumn after it became known that the Dutch authorities were investigating ABN Amro on suspicion of money laundering. The second largest institute in the country after ING is said to have submitted suspicions of money laundering too late or not at all. At the end of February, the German branch was raided. This time it was about the possible support of tax fraud (“Cum-Ex”).

More: In the corona crisis, private investors are particularly affected by a series of breakdowns in trading platforms.

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