What’s Spanish for piggybacking?
We ask, because there’s a rather interesting detail on the reconstruction of Spanish bank funding in JPMorgan’s most recent Flows and Liquidity note:
Peripheral banks in particular have increased their participation in interbank markets markedly since August driven by Spanish banks. This can been seen in Chart 2 [above, click to enlarge] which shows the rapid increase in repo market volumes at MeffRepo, the domestic Spanish repo platform.
Effectively small Spanish banks are using Meff to get funding from big Spanish banks, which then use LCH to obtain funding from international banks. MeffRepo has currently 19 participants with 13 more Spanish banks in the process of joining.
Paseo en los hombros indeed. It’s interesting, because peculiarities in the Spanish repo market — and, crucially, its relative international isolation – helped exacerbate the interbank crisis that followed Europe’s sovereign contagions during the spring.
At least they’re being fixed, via the use of a central counterparty like LCH.Clearnet for clearing transactions. On the other hand, the piggybacking between big and small Spanish banks all looks very two-tiered… which has been rather a theme in euro money markets in 2010.
Note too that this return to interbank funding comes amid the European Central Bank going on the offensive against banks ‘addicted’ to liquidity it provides at regular operations. This offensive has continued, but one test appears later on this week. As Divyang Shah of IFR Markets notes (link added, emphasis in original):
When the ECB indicated that they were looking into the addicted bank problem it seems that European banks decided not to bid aggressively following the maturing [of several ECB operations] on September 30. The net result has been that a combination of frontloading for the current reserve maintenance period and banks finding themselves a little short has led to some significant upside on EONIA rates. In addition to the usual weekly MRO the ECB will also be conducting a 3-month LTRO which is with fixed rate and full allotment (but the rate will be the average of the MRO rate). These operations are likely to soothe the liquidity situation in the Eurozone money market…
It is worth keeping in mind that this is the first time in a long time that the 3-month operation will be conducted when 3-month Euribor is trading above the ECB’s refi rate of 1.00%. The movements in the money market has led 3-month Euribor to break through 1.00% last week with the latest fixing being at 1.029 (although 3-month EUR Libor is still below 1.00%)…
Related links:
Mi casa es su casa: Spanish clearing and collateral – FT Alphaville
Spanish interbank spectres – FT Alphaville (June 2010)