EU banks’ summer funding lull may bring autumn woe
By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
European banks have had a nervy summer. Indicators of stress in bank funding markets are flashing red, raising fears of another 2008-style crisis. Those concerns look misplaced for now. But if markets don’t improve, the autumn could bring fresh problems.
Banks fund part of their balance sheets in the wholesale markets by issuing cheap debt less than twelve months in maturity and pricier longer-dated “term” funding. In 2008, wholesale creditors were so worried many only lent overnight, or not at all. Banks that depended heavily on wholesale funding went bust, or had to seek state support.
This time around, there are two vital differences. First, post-crisis reforms mean banks are better capitalised and have bigger cash buffers to withstand lengthy market freezes. Moreover, Europe’s biggest lenders have on average completed 90 percent of their term funding needs for 2011, according to Morgan Stanley. Second, any bank that runs into short-term trouble can access the European Central Bank’s weekly liquidity facilities, which are unlimited providing the lender has sufficient collateral.
As a result, European banks should be able to get through a stormy summer. Concerns about sovereign debt mean they have raised hardly any term funding since May — but banks do not tend to issue much in the summer months anyway.
However, if politicians do not come up with a solution to the euro zone’s sovereign problems by September, there is a chance that banks will struggle to complete the 80 billion euros of term funding they still need this year. Then there’s the 1.7 trillion euros of funding required by 2014.
And even if markets do reopen, banks will still have to pay up: the cost of insuring the debt of the average European lender has almost doubled to 215 basis points since the spring. If average funding costs rise by a similar amount, profit margins will be squeezed. The earnings of smaller Italian lenders would be hit badly: UBI Banca’s would fall by a third, Morgan Stanley reckons. Banks would respond by shrinking their balance sheets, starving the economy of credit. The true impact of the current bank funding woes may not be a bank collapse, but an even more remote prospect of economic recovery.