FT Alphaville has talked about the vaporisation of unsecured lending in Europe, as well as the consequent impact on quality collateral via the rush towards collateralised lending.
But in case you didn’t believe us, here’s the news straight from the horse’s mouth via the ECB’s Euro Money Market Survey 2010:
As the ECB’s press release summed up on Wednesday (our emphasis):
23 September 2010 – Results of the Euro Money Market Survey 2010 Today the European Central Bank (ECB) is publishing the results of a survey entitled “Euro Money Market Survey 2010”, which highlights the main developments in the euro money market in the second quarter of 2010, in comparison with the second quarter of 2009.
The results from this year’s survey, derived from a constant panel of 105 banks (unless otherwise stated), show the following:
* Aggregate turnover in the euro money market declined for a third consecutive year, albeit at a slower pace, falling this year by 3% from its level in the second quarter of 2009. The most notable declines in activity took place in the overnight index swaps (OISs) segment (-19%) and in the unsecured market (-18%).
* In the unsecured market the decline was most pronounced for unsecured cash borrowing and, within this particular segment, for maturities of more than one year and for maturities ranging from one to three months.
* The secured market remained the largest segment, with its aggregate turnover increasing by 8%. This increase was driven mostly by a 14% increase in activity for maturities between tomorrow next (T/N) and one month. Overnight activity (O/N) in the secured market declined instead by 8%.
* The share of transactions in the secured market that was cleared by central counterparties (CCP), as a subset of the repo market, rose from 41% of total repo transactions in 2009 to 45% in 2010.
* All except one of the derivatives segments covered in the survey experienced a decline in turnover in 2010. The most significant drop took place in the overnight index swaps (OISs) segment, where turnover fell by 19%. Turnover in forward rate agreements (FRAs) decreased by 10% in 2010 following a rise over the previous two years. In other interest rate swaps excluding OISs (“Other IRSs”) and cross-currency swaps (“Xccy swaps”) turnover decreased by 11% and 4% respectively. The only derivatives segment that did not suffer a decline was the foreign exchange swaps segment (“FX Swaps”), where turnover increased by 3%.
* The qualitative part of the survey shows that liquidity conditions and efficiency in the unsecured market continued to deteriorate.
In cross-currency swaps, liquidity conditions were perceived to have worsened significantly. The qualitative input also shows that market liquidity stabilised or even improved in most other segments of the euro money market between the second quarter of 2009 and the second quarter of 2010.
* Looking at concentration among market participants, the unsecured market segment remained the least concentrated one. By contrast, the FRAs segment was the most concentrated while the secured segment lay somewhere in between these two extremes.
* Turnover in outright transactions for short term securities in the secondary market saw a large increase (67%) in the second quarter of 2010, mainly driven by an increase in transactions related to securities issued by credit institutions.
* The share of trading with counterparties outside the euro area increased in the unsecured segment. Data on the geographical breakdown of collateral used in bilateral repos (according to the full panel of 172 banks) showed that the share of ‘national’ collateral in total repo transactions declined to 32% in 2010 compared with 36% in 2009. In most of the derivatives segments the share of trading with ‘national’ counterparties increased.
* In the unsecured market and in the FX swaps and FRAs segments the share of direct trading increased while in the secured market, the OIS, other IRSs and cross currency swaps segments, it was the share of electronic trading that increased.
And here’s the divergence towards collateralised lending in chart form the main report.
But, what we found most striking were the results of the qualitative survey:
Which means almost three quarters of the market thinks the unsecured market is currently running inefficiently, and about half thinks it’s actually worsened since the 2008 Lehman crisis.
So much for lower interbank borrowing rates, eh?
Clearly not much use in the land of two-tier rates.
Related links:
In the land of two-tier rates… – FT Alphaville
In the land of two curves, one price – FT Alphaville
‘General collateral remains puzzlingly inverted to fed funds’ – FT Alphaville
`Euribor has been vaporised – FT Alphaville