"British banks including Royal Bank of Scotland and Barclays may be sitting on billions in losses from the collapse in oil prices after a surge in junk loans to the industry.
UK banks have been behind more than $50bn of leveraged loans — high-yield, non-investment grade debt — to the oil and gas industry in the past four years, according to data from Dealogic.
Although British lenders are not the most exposed to the oil collapse, with most debt issuance arranged by US and Canadian institutions, leveraged loans arranged by UK lenders have more than doubled since 2011 amid the North American shale boom.
The price of Brent crude has slumped from $110 a barrel last summer to $48.91 on Friday, amid a glut in supply and falling global demand.
While low prices are likely to give a shot in the arm to consumers and manufacturers, many oil producers, particularly in America’s shale gas fields, are likely to be driven out of business.
A lengthy period of cheap crude is likely to trigger widespread defaults and many oil and gas loans are now changing hands for well below their face value as investors fear they will not get their money back.
Banks will offload many of the loans and hedge their losses, and some will have stricter lending standards for high-yield loans than others.
Losses will also depend on how long the oil price stays low, so it is unclear precisely how exposed the banks are to the energy industry’s woes.
Some lenders have privately indicated that they consider the oil price fall to have a positive impact, with the wider economic benefits offsetting the loans they are writing off. However, significant losses are seen as inevitable if prices fail to rebound.
Chirantan Barua, an analyst at Bernstein Research, has estimated that the combined losses of Barclays, RBS, HSBC and Standard Chartered from falling oil prices could amount to $3.4bn..."