European Energy Market Spooked By $1.5 Trillion Liquidity Crisis

By Alex Kimani – T

• Norway’s Equinor: European energy trading is under severe strain by margin calls. 
• Equinor: governments should provide more liquidity buffers to keep volatility down.
• Brussels-based NGO Finance Watch: the 60 largest banks in the world have fossil fuel exposures of ~$1.35 trillion.

As Europe continues to grapple with a daunting energy crisis, European energy markets still face a liquidity disaster, with financial institution exposure to fossil fuels and record levels of margin calls sounding the alarm bells.  According to Norway’s Equinor ASA (NYSE: EQNR), European energy trading is under severe strain by margin calls of at least $1.5 trillion, putting extra pressure on governments to provide more liquidity buffers.

Aside from fanning inflation, the energy crisis is sucking up capital to guarantee trades amid wild price swings. Energy prices have been fluctuating over such a broad range that many firms are now struggling to manage margin calls, making them demand additional collateral to guarantee trading positions while also forcing traders to secure multi billion-euro credit lines.

“Liquidity support is going to be needed. This is just capital that is dead and tied up in margin calls. If the companies need to put up that much money, that means liquidity in the market dries up and this is not good for this part of the gas markets,” Helge Haugane, Equinor’s senior vice president for gas and power, has told Bloomberg. Haugane has noted that derivatives trading is where support will be needed, and added that the $1.5 trillion estimate is actually a conservative one.

A report by the Brussels-based NGO Finance Watch reveals that the 60 largest banks in the world have fossil fuel exposures of ~$1.35 trillion with more than half of this total exposure on the books of Asian banks. However, the report notes that the 22 European banks featured in the analysis account for $239 billion of credits doled out to finance fossil fuel activities, with North American banks carrying a comparable amount.

Finance Watch has also calculated how much additional capital these banks would need to properly account for the risk of these fossil fuel exposures becoming stranded assets. The report says that although EU and North American banks have about the same amount of fossil fuel exposures, EU banks would need significantly more capital to cover the risk since they are backed by significantly less equity.

But will European banks be able to step up to the plate? Finance Watch has argued that banks should back fossil fuel exposures with additional capital. The NGO advocates for a risk-weight of 150%, meaning that every loan given to companies for existing fossil fuel activities would have to be backed by 12% of capital…….more here

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