Remember Long Term Capital Management and AIG? I sure do. LTCM imploded in 1998, in large part, because of its investments in Russian treasuries and other emerging market securities. In 2008, AIG Russia almost declared bankruptcy because a unit in London that barely anyone knew about, was selling protection, through credit default swaps, to banks who were protecting against defaults on securitizations. Why does this walk down memory lane matter? Because here we are in 2022, and sadly, we are still in a situation where there is tremendous opacity in the global financial system. If it were just rich investors losing money, the vast amount of the global population would hardly lose sleep. However, when financial institutions lose money, they invariably impact unsuspecting citizens.

Multiple international standard setters such as the Financial Stability Board and the Bank for International Settlements have long warned that Other Financial Institutions (OFIs), also known as non-banks and shadow financial institutions, need to be regulated and supervised. Many of them are not. Yes, the largest ones are often publicly traded, so they have financial disclosures, but that does not mean that they are supervised and examined with a risk based supervisory approach in the manner that banks and insurance companies are.

Financial Institutions Are Interconnected With Russia and With Each Other

Russia’s invasion of Ukraine has shed light on the interconnections of financial institutions and Russia. Unfortunately, these interconnections are a reminder of the tremendous opacity that still exists in the financial industry, even after the lessons that we should have learned in 2008.

Banks’ credit and market exposures are much easier to understand because how they are regulated means that there is much more information that they have to disclose. The problem, however, is that since a huge swath of the global financial sector is not regulated like banks are, the full extent of the financial industry’s credit and market exposures to Russia is unknown. A wide range of asset managers, hedge funds, home offices, insurance companies, pension funds, sovereign wealth funds, and university endowment funds have investments in Russian financial assets, that is, bonds, stocks, commodities, loans, and the ruble.


Goldman Sachs, JP Morgan, Commerzbank, and grudgingly, even Deutsche Bank, have announced that they are exiting Russia. Exiting will take time, and no doubt, it will be a complicated endeavor. Leaving Russia does not necessarily mean that these banks will automatically stop lending to entities in or citizens of Russia or that they will stop trading Russian bonds, foreign currencies or commodities. Further pressure from different stakeholders, especially those who want these banks to comply with global environmental, social, and governance standards (ESG), will no doubt continue to influence bank executives’ decisions.

Fortunately, foreign banks exposure to Russian residents, financial institutions and companies is relatively small in comparison to their total banking assets. Basel III capital and liquidity standards, adopted as requirements in over 30 countries also means that banks are in far better shape to sustain unexpected losses than they were back in the mid-2000s. Bank for International Settlements data shows that the countries, which banks have the largest exposures are Italy, France, Austria, and the US The banks with the largest exposures to Russia are Raiffeisen Bank International ($25bn), Société Générale ($21bn), Citibank ($10bn), Unicredit ($8.1bn), Credit Agricole ($7.3), Intesa Sao Paulo ($6.1bn), ING ($4.9), BNP Paribas ($3.3), Deutsche Bank ($1.5bn), and Credit Suisse ($1.1bn ). These banks, especially the European ones, are the most likely to be adversely impacted if the Russian invasion intensifies.