With officials in Brussels dealing with the European debt crisis and planning out how to bring the continent out of the long recession, and many of the nation’s credit ratings already downgraded by Standard & Poor’s, it’s time to consider the extent of American banks’ exposure to this ticking time bomb. Should Greece or another struggling European nation default on their debts, it could set off a chain of events and cash calls that will be crippling to the global financial system.

How much exposure do American banks have to this potential mess? More than you’d like to hear, according to the New York Times.

Big Banks on the Watch

Dealbook reports that five big American banks’ exposure to Europe’s so-called PIIGS nations (Portugal, Ireland, Italy, Greece, Spain) adds up to more than $80 billion.

Cumulatively, the banks have hedged their positions by $30 billion, mostly through investing in credit default swaps. The banks analyzed include Bank of America®, Citigroup, Goldman Sachs Bank USA, Morgan Stanley, and JPMorgan Chase.

Of the retail banks represented, Citigroup has the most exposure, but has also done the most to hedge their positions. According to the Times, Citigroup has $28.9 billion in exposure to the PIIGS, but has taken out $9.6 billion in swaps to protect themselves from defaults. Factoring in the protection they have bought, including $4.2 billion in collateral, Citi’s exposure is $15.1 billion. About half of Citi’s exposure to these risky economies is hedged.

Compare that to Bank of America®, which “appears to have hedged the least, with only 12 percent of its stated $14.4 billion exposure offset with credit-default protection,” writes the Times.

But the larger concern here is that issuers of credit default swaps won’t be able to pay up should one of these nations default. The Times points out that American Insurance Group “nearly collapsed because it could not make payments on its side of the its swaps contracts.” An institution that has issued too much insurance on Portuguese debt might find itself collapsing should Portugal default. And so, Citibank, despite having purchased protection on its exposure, might still be in trouble should Europe’s debt talks fall apart.

Insurance doesn’t necessarily reduce systemic risk; if anything, it might be masking it.

Read the story here.

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