European Banking Authority (EBA)
One Canada Square (Floor 46)
London E14 5AA| UK
Dear Professor Draghi,
We are a Group of professionals in the field of banking and finance who would like to draw your attention, and that of the ECB, to the need of shedding light on the risks which financial derivatives pose to the banking sector and which were not revealed in the Asset Quality Review.
It is our conviction that a bank is just likely to suffer from an excess of non-performing loans as it may suffer from losses in financial derivatives and structured products.
From a technical point of view, it therefore appears quite hard to understand that the risks arising from lending practices were promptly analysed while those arising from exposures to financial derivatives did not receive sufficient oversight, especially those reported in the Level 3 bucket.
An appropriate analysis of derivatives and level 3 assets is also topical and necessary for a check-out of the recent regulation on the prudent valuation of these products. It would be
then extremely important to verify if the amount of capital currently posted by banks against the possibly wrong valuation would suffice to shield the changes in accounting values that could actually occur in a stress scenario.
We also think that the review should be based on models produced by the ECB rather than merely relying on internal valuation models produced by the banks. This would be helpful to clarify the risks which these derivatives pose and would help prevent the market panics that we have recently witnessed.
We are also convinced that this analysis is particularly urgent given the recent bail-in regulation, that has already shown the increase of risks not only for shareholders but also to the sub-ordinated bondholders and potentially all the other claims up to deposits above 100k.
We sincerely hope that the ECB will help to prevent the insurgency of these problems, by undertaking this special review.
We thank you in advance for your understanding.
I agree: https://goo.gl/ihIA25