A nice visualisation from Fitch of which countries’ banks accounted for most net new liquidity provided by December’s first three-year LTRO, ahead of the second liquidity op this week:
Mostly the Spanish and Italians, which we already knew, with a bit of help from German mortgage banks. And as you can see, French banks were responsible for much of the gross number (EUR 489bn) but mostly used the facility to replace earlier funding with the ECB.
We’ve covered this quite a bit and this will likely be our last post on it before the results come out on Wednesday morning (about 1015 UK time). Without making any estimates about the final takeup (consensus has fluctuated around EUR500bn for a little while, though lately it’s trended a bit lower) the Fitch report includes a few notes about which countries’ banks will make the most use of the final three-year LTRO tomorrow — and how they’ll use the new liquidity — that we thought worth mentioning.
The broad message is that countries are expected to participate the offer roughly in proportion to what they did the earlier round…
… but the specific points are more interesting.
Italian banks, for instance, are well positioned to benefit from the wider range of collateral accepted by the ECB (emphasis ours in all cases):
Fitch understands that the LTRO funds to date have been used primarily to replace short-term interbank and institutional funding or wholesale maturities, with very little invested in government debt so far. The Bank of Italy expects the banks to use LTRO funding to sustain loan availability to the real economy.
Measures taken by the Italian government and the central bank have enabled the banking sector to increase available ECB-eligible collateral substantially. This additional collateral has eased pressure on funding, which had intensified during Q411. According to the Bank of Italy, at end-January 2012 the Italian banking sector had about EUR150bn unencumbered eligible collateral. The recent decision to allow additional assets (rated loans) as collateral could increase available collateral by about EUR70bn-90bn. This puts the total of potential unutilised available collateral prior to February’s LTRO at around EUR250bn.
And expect additional usage by German mortgage banks and some Landesbanks:
The story for the German banks is mixed. Deutsche Bank AG is keen to remain aloof from any use of state or ECB support during the crisis. It continues to place funds with the ECB and other central banks, sitting on alarge liquidity cushion, rather than borrow.
In contrast, some of the mortgage banks in particular, whose business models rely on wholesale funding and interbank liquidity, have made welcome use of the facility. Fitch understands that other German banks, including some Landesbanks have taken the opportunity to obtain cheap three-year money, partly to replace shorter-term ECB funding. Deposits placed with the ECB from the German banking system far outweigh borrowing.
Greek banks at this point have no eligible collateral, obviously, so they won’t play, but Portugal and Ireland might:
Banks in the three most troubled, small peripheral eurozone countries have all for some time been dependent on ECB funding and, when collateral ran out, funding from their national central banks in the form of ELAs or other facilities.
There is little transparency about these direct central bank facilities, and they are around 200bp more expensive than LTROs. Where collateral is available (Portugal and probably Ireland), the banks will use the LTRO instead.
And the Spanish cajas have been prepping:
While the larger Spanish banks did borrow under the December LTRO to some extent, Fitch understands that this either replaced their short-term repo facilities with clearing houses or was deposited back with the ECB. The move to clearing house repos had been evidenced by a gradual trend away from the ECB’s MRSO by Spanish banks in 2011.
Fitch understands that the medium-sized cajas are likely to take up further three-year funds in February and will use the carry trade to help finance their restructuring processes. From their perspective, their fate is inextricably linked with Spain’s in any case, so the extra risk seen by banks across the border does not affect them to the same extent. Several medium-sized cajas have issued and retained government-guaranteed bonds to use as collateral.
On balkanisation and credit claims – FT Alphaville
The L-troh, the credit crunch, and the carry trade – FT Alphaville
Draghi must be wary of Ltro elixir’s power – FT
LTRO coverage – FT Alphaville