Banks' Exposure Stirs EU Contagion Worries

One reason why Ireland's problems could ripple throughout Europe is that banks across the continent are holding huge quantities of loans, bonds and other debt issued by Irish companies, individuals and national and local governments.

All told, European banks were sitting on more than $650 billion of exposure to Ireland as of March 31, according to the Bank for International Settlements.

The U.K. banks are the international lenders with the most at stake. As of March 31, the latest data available, the banks had exposure of about $222 billion to a variety of Irish institutions, according to BIS. That is about one-fourth of the world's exposure to Ireland. About $42 billion of the U.K. banks' exposure is in the form of lending to Ireland's battered banking sector.

German banks aren't far behind the U.K. They had a total of almost $206 billion in exposure to Ireland, according to the BIS, including $46 billion of exposure to the country's banks.

Among U.K. banks with exposure to Ireland, Royal Bank of Scotland PLC is at the head of the pack, largely through its retail and commercial Irish unit Ulster Bank, but also due to investment-banking holdings of government debt. According to analysts and people close to the bank, RBS's total exposures to Ireland stand at GBP 54.4 billion ($86.4 billion), with GBP 53.3 of retail and commercial exposure, a third of which is residential mortgages.

The bank also has about GBP 1 billion in exposures to Irish sovereign and other debt in its investment-banking trading book.

RBS's share price tumbled Tuesday as EU and Irish officials tussled over a rescue package, closing down 3.45%, at 40.86, on the London Stock Exchange.
Yet some analysts dismissed investor concerns.

'We believe that these worries are overdone with RBS's direct exposure to Irish [government] debt at very modest levels and other exposures being actively managed,' wrote UBS AG analyst John-Paul Crutchley late last week.

Lloyds Banking Group PLC has the second-largest exposure to Ireland of the U.K. banks. It has GBP 27 billion of Irish loans outstanding, including GBP 11 billion of problem loans, largely related to the property and corporate sectors.

As of June 30, the bank had set aside GBP 5 billion against that troubled portfolio.

According to the Committee of European Bank Supervisors, which conducted stress tests on all Europe's banks in July, Lloyds has minimal sovereign exposure.