FDIC bank debt program to end with a whimper
The Federal Deposit Insurance Corp’s debt guarantee program in many ways saved the banking system from collapse during last year’s worst of times. Banks were effectively shut out of the credit markets after Lehman Brothers scared bond investors silly. More than $270 billion of guaranteed debt has been sold since the FDIC adopted the program in October.
The program ends in October, as it should. It’s served its purpose and there’s no reason to keep subsidizing banks with cheap financing now that they’re making gobs of money and handing out jaw-dropping bonuses. But don’t expect the banks to start crying uncle when they have to raise funds the old fashioned way without the FDIC backing. That’s because they don’t have to.
Analysts over at Bank of America Merrill Lynch note that it’s non-guaranteed bank debt has already slowed to trickle and it’s pace over the next few quarters will be much lower than that seen under the FDIC program, known by its acronym TLGP.
Such (senior unsecured) bank issuance averaged $25bn monthly in the pre-crises period between Jan. 2007 and May 2008. The pace of TLGP issuance was somewhat higher, averaging $29bn per month, with most of it coming in December and January (see Figure 1). Yet, only an average of $6bn in unguaranteed bank paper was issued per month in June and July of this year.
This lower level of issuance has been caused by the fact that the recent offerings have been strategic rather than economic. The $25.5bn issued in May was largely a pre-condition for TARP repayment, and most bank supply since then has been done for this reason or to demonstrate continued access to the primary market. Such issuance aimed to maintain market access will trail pre-crises volumes. This is due to three factors: term unsecured funding is more expensive than other sources, banks are still deleveraging, and banks are currently flush with balance sheet liquidity. C&I loans from large U.S. commercial banks, for example, fell 12% from their peak levels in 2008, according to Fed data. At the same time, deposits as a source of funding have become more plentiful, rising 15% since August of last year (see Figure 3 and Figure 4).
This supply technical is likely to be a positive factor for bank spreads until future growth requires new debt issuance or when TLGP debt matures and potentially needs to be replaced by corporate bond funding.
It also makes sense then for banks to hold back. Tighter spreads mean better financing when they eventually come back in force.