Bank of England checks commodity exposures of financial institutions

Neil Hume, Martin Arnold and David Sheppard
The Bank of England
Getty Images

The Bank of England has asked British financial institutions to reveal their full exposure to commodity traders and falling prices of raw materials amid concerns over the impact of the oil and metals slump.

The Bank of England's Prudential Regulation Authority, which was set up in 2012 to ensure the "safety and soundness" of banks in the wake of the financial crisis, sent the requests to the UK's big banks in the past week, according to three people with direct knowledge of the matter.

The PRA move that mirrors similar inquiries it made earlier this year about the banks' exposure to Greece and to China, was prompted by a sharp drop in the shares of Glencore, the biggest publicly listed trading-house-cum-miner at the start of last week.

It was not provoked by any immediate concerns of a default, a person familiar with the matter said, but it was checking that banks knew what their exposures were to individual commodity houses and that they had examined the wider knock-on effects if a large commodity trader was to collapse.

IMF warns of financial crisis as EMs slow

The PRA also wants to ensure banks — many of whom trade oil and metal themselves as well as financing commodity dealers and companies — are prepared in the event of a prolonged slowdown in the sector.

The 30 per cent one-day crash in Glencore's share price last week was followed by a flurry of notes from City banking analysts about the exposure of lenders to the industry.

A person familiar with the move said: "This is not something we do every month, it is situation-specific," adding it was a specific response to the recent share price moves of Glencore and other commodity trading houses.

Glencore's share price has rallied hard since last week after a series of statements reaffirming the financial soundness of its business and renewed promises to execute a debt reduction plan that should reduce its $30 billion net debt by a third.

The company declined to comment on Thursday.

More from the Financial Times:

Bill Gross sues Pimco for $200m over ousting
Low inflation worries dog Fed as it debates rate rise
US warships to challenge Chinese claims in South China Sea

Bankers who deal directly with commodity traders said they thought some of the reports by analysts were alarmist and betrayed a lack of understanding of how the industry operates.

The drop in commodity prices has greatly reduced the amount of money traders need to tie-up financing for the shipment of millions of barrels of oil and tonnes of metal.

"I don't think these analysts realise how well trading houses are performing at the moment or that working capital requirements have fallen sharply with commodity prices," said one commodity finance banker who declined to be named.

"There's a disconnect between what we are seeing in the equity market and how the physical traders are performing."

Vitol, the world's largest independent energy trader, this week closed a syndicated loan for $8 billion, including the participation of several new banks.

Swiss-based Trafigura, another of the world's largest independent oil and metals dealers, signed a $2.2 billion facility last week at a lower cost than last year. It was originally planned to be $1.6 billion but was oversubscribed.

Trafigura has indicated its 2015 financial year performance, which runs to the end of September, has been strong, boosted by increased storage and trading opportunities in oil following the near halving in prices since last year.

Read MoreBank of England keeps rates at 0.5% as doves grow louder

"We have an open line of communication with the Bank of England and other regulatory authorities and we're always happy to discuss any aspect of our funding or business models," Trafigura said.

"We have extremely strong access to bank liquidity."

Bankers said that while commodity houses that have a greater reliance on mining and producing the products they trade would have a larger exposure to underlying prices, there is no evidence even so-called "asset heavy" traders are in real financial distress.

Glencore, which made more money from mining than trading following its takeover of Xstrata before the commodity crash, has seen its shares fall almost 60 per cent so far this year and 75 per cent since it first listed at 530p in 2011.

Its shares hit an all-time low of 67p a share on September 28 but have since rallied by 85 per cent to trade at 122p on Thursday, helped partly by a stabilisation in copper prices.

Asian commodity trader Noble Group, which is battling allegations of aggressive accounting as well as lower commodity prices, has fallen 65 per cent in 2015.