Rumours of funding problems at French banks have been rife this summer.
Without even getting into specific financial firms, you can see a potential issues.
French banks do have a relatively higher reliance on wholesale funding, and that’s made them easy targets for anyone remotely squeamish about funding. The ratio of deposits to total assets at French banks, for instance, equated to about 31 per cent in 2010, according to UBS figures. That’s compared to 36 per cent for Europe as a whole, 39 per cent for US banks, and a whopping 42 per cent for British ones.
What’s more — French banks have also traditionally been heavy users of short-term funding markets in their corporate and investment banking (CIB) businesses. We all know by now that these have been pulling back from Europe. The FT reported in July, for instance, that US money market funds (MMFs) had sharply cut their exposure to European banks, including France.
Some detail from an excellent note by UBS analyst Omar Fall:
The numbers involved are significant as a percentage of French banks’ total short-term funding requirements. CASA disclosed at its Q2 11 results that it had $36bn in US commercial paper outstanding, against total short-term funding outstanding of €140.6bn. SocGen had some $38bn in US CP/CDs outstanding at the end of Q2 11, against total short-term debt issuance of €96bn at the end of June. BNP Paribas has not disclosed its US CP/CDs outstanding, but given the respective balance sheet sizes and external disclosures … it is likely to be materially higher than the other two banks.
These funding stresses are neither a solvency nor even truly a liquidity issue, given central banks’ unlimited provision of funding for the banks that require it. Indeed, French banks hold significant amounts of unencumbered assets pledgable to central banks and liquid assets ready for sale (CASA had €120bn of liquidity reserves as at 31 July, SocGen c€105bn at end-June and BNP Paribas had €150bn of unencumbered assets eligible for central banks in mid-July).
The issue is one of confidence and cost: confidence, given that it is not a sustainable sign of faith in the region that some of the largest banks in the Eurozone, with generally sound asset quality and business models, struggle to fund themselves in public markets; cost, given that the cost to French banks of funding in US CPs was around LIBOR +10bp. Central bank funding in US$ would cost some 100bp more.
A money market shift away from French banks, then, might equate to yet another drag on earnings and a rather big piece of evidence of the MMF market’s lost confidence in anything euro-related.
For UBS, it means French banks will simply have to pull back on their short-term CIB balance sheets But, of course, that itself will mean another drag on the French banking business — at best.
UBS have accordingly cut their 2012-2013 French bank earnings estimates by 14-21 per cent.