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ECB Seeks Details on Banks’ Hedge Fund Risks After Archegos

Steven Arons and Nicholas Comfort
·2 min read

(Bloomberg) -- Europe’s top financial watchdog has asked some of the bloc’s largest banks for additional information on their exposure to hedge funds after the recent collapse of Archegos Capital Management.

The checks by the European Central Bank on lenders such as Deutsche Bank AG and BNP Paribas SA are standard practice after such a disruptive event for the industry, according to people familiar with the matter. All banks supervised by the ECB that have a significant hedge fund business are likely to face these questions, they said, asking not to be identified discussing the private information.

Representatives for the ECB, Deutsche Bank and BNP declined to comment.

The collapse of Archegos, a secretive family office that had made highly leveraged bets on stocks, could cause as much as $10 billion of losses for banks, analysts at JPMorgan Chase & Co. estimate. Swiss lender Credit Suisse Group AG alone has put the expected hit at 4.4 billion Swiss francs ($4.7 billion) in the first quarter.

Euro-region banks, by contrast, have come away largely unscathed. Deutsche Bank had several billion dollars of exposure to Archegos when it started unraveling but the German lender quickly sold its holdings, Bloomberg News has reported. It said it won’t incur a loss as a result of the firm’s collapse.

Archegos put on its trades with the help of so-called prime brokerage units at a number of investment banks, effectively borrowing large amounts to amplify returns. When the investments declined and lenders asked for more collateral, the firm collapsed and banks raced to unwind the positions with prices plummeting.

Prime brokerage units make money by lending cash and securities to hedge funds and executing their trades. The business is risky but lucrative, earning European banks Barclays Plc, BNP Paribas, Credit Suisse, Societe Generale SA and UBS Group AG a combined $4 billion in 2019, according to a report from JPMorgan.

“There is a need to scrutinize the reasons why the banks enabled the fund to leverage up to such an extent,” ECB executive board member Isabel Schnabel said in an interview with Der Spiegel last week. “It is a warning signal that there are considerable systemic risks that need to be better regulated.”

(Adds previous comments from ECB executive in final paragraph)

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