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This is certainly something that rattles the bones. Read this article from Reuters, but it essentially confirms, via 2 unnamed sources, that the Commodity Futures Trading Commission issued a wavier to a mystery bank on Friday after its exposure to the energy sector increased past $1B. This is a critical threshold created in the wake of the 2008/9 financial crisis. That bank was Capital One.
WASHINGTON/NEW YORK (Reuters) – U.S. lender Capital One Financial Corp got a waiver from the Commodity Futures Trading Commission (CFTC) after plunging oil prices increased the bank’s derivatives exposure above a key regulatory threshold, according to two sources with knowledge of the matter.
The assertion is Capital One must have bet big that oil prices wouldn’t plummet to the levels they’re currently at, and Cap1 has found itself on the wrong side of a big trade. The waiver, which expires Sept 30th, gives Cap1 some breathing room and time to allow energy prices to come back up. If not… they would have to register as a swap participant, and secure their position with collateral. What does that mean? It would mean they would more than likely have to pony up some major cash to meet regulatory guidelines. Reuters says that Cap1 only allocated 1.4% of its loan book to the energy sector – part of that business being commodity swaps in the energy sector.
Covid was certainly a black swan, and many consider the broil over oil another black swan…although not nearly as statistically improbable as a global pandemic shuttering economies around the world. Nonetheless, Tthe feud between Russia and Saudi Arabia is still going strong, many even questioning whether there will be containers to store the oil all of the oil produced let alone prices spiking. This presents a very big problem for Cap1 if things don’t improve by end of September. In fact, US storage containers will be full up within 30 days if production continues as is; however, Saudis have intimated that they may even increase oil production by 25% to 12 million barrels a day in April. Current prices are well below the level needed to turn a profit, but both countries have healthy foreign reserves, and the fued could drive prices into the teens. I don’t think anyone is looking around the globe and forecasting a major rush in industrial output through April, but an oil glut isn’t going to help things in the energy sector.
This story stuck out to me because Capital One changed the game at the end of 2018, by not only offering the ability to transfer points to partner programs, but also a mega 200k+ offer on their Spark Miles card. Many of their partners crossover with other bank programs like Aeroplan, Air France, Emirates, Singapore, etc. If you’re holding a major balance in Cap1…I would keep a close eye on this story as it develops through the summer.
Here’s a list of Cap1 transfer partners
- Air Canada Aeroplan
- Air France/KLM
- Cathay Pacific
- Emirates ( 2:1)
- Singapore Airlines ( 2:1 )
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