Another good snippet from the BIS quarterly review that’s worth highlighting comes in the observation that banks are losing their raison d’etre due to the erosion of their funding advantages versus non-banks. Which means they’re increasingly resembling listless entities devoid of purpose in a capital shadowland that’s not willing to let them move onto another more deathly plane.
From the survey (our emphasis):
The erosion of banks’ funding advantage limits their effectiveness as intermediaries. There are indications that euro area banks, for instance, passed on some of their relatively high borrowing costs. The average interest rate on euro area bank loans stalled at levels above 3% over the past three years, in spite of falling policy rates. As the cost of funding in bond markets trended downwards, large corporates increasingly faced incentives to bypass banks and tap markets directly (Graph 6, left-hand panel).
The probe into the abuse of Libor during the financial crisis continues. Investigators are sorting through allegations of criminal intent and regulatory shortfalls, with three of the world’s biggest banks – UBS, Citigroup and Barclays – voluntarily approaching regulators with information about possible abuse of the rate-setting process by current and former staff, according to the FT.
Given the above it’s interesting to come across the following justification from JCD Rathbone (JC Rathbone Associates) as to why banks may have felt compelled to break the rules. From Tuesday’s Weekly Bulletin (our emphasis): Read more
January is on track to be one of the busiest in more than a decade for global covered bond sales by banks, as lenders race to secure funding after the eurozone sovereign debt crisis led to a dearth of issuance, the FT reports. The first three weeks of the year have seen a flurry of covered bond issuance, a type of over-collateralised debt that is considered very safe by investors, from northern European banks such as Aereal Bank, Lloyds Banking Group and UBS, as well as Australian lenders. So far this year $43bn has been raised by global banks using covered bonds, the second strongest start to the year since 2000, according to Dealogic. Significantly it is the first time that European banks have issued more covered bonds than senior unsecured debt, traditionally seen as the bedrock of bank funding but which in the second half of last year saw issuance in Europe slow to a crawl.
Markets and governments face an uphill struggle to fund themselves next year amid extreme uncertainty over the eurozone and the global economy, as new figures reveal that the borrowing of industrialised governments has surged beyond $10tn this year and is forecast to grow further in 2012, according to an OECD report. The FT reports the OECD will warn in its latest borrowing outlook, due to be published this month, that financial stresses are likely to continue with the “animal spirits” of the markets – their unpredictable nature – a threat to the stability of many governments that need to refinance debt. Hans Blommestein, head of public debt management at the OECD, said for the foreseeable future it would be a “great challenge” for a wide range of OECD countries to raise large volumes in the private markets, with so-called rollover risk a big problem for the stability of many governments and economies.
Eurozone banks borrowed more than €8bn from the European Central Bank overnight on Thursday, the highest amount since March, in a sign of the deep strains in the financial markets, the FT reports. Traders said the jump of overnight lending by the ECB highlighted the inability of virtually all eurozone banks, with the exception of the very strongest, to get funding from the markets. One trader said: “Just look at my screen. It tells the story. I have one big European bank willing to lend and 40 banks wanting to borrow. And look at those names, they aren’t little regional banks. They are some the biggest banks in the eurozone and they can’t get funding in the market place. They have to go to the ECB.” Other traders said the spike might be an exceptional, one-off. For them, it is worrying, but only extremely serious if the high level of borrowing from the ECB continues. In that instance, then in the eyes of some it suggests the private lending markets for eurozone banks has more or less broken down. The ECB emergency lending facility saw €8.64bn loaned to eurozone banks on Thursday – the highest since spikes in March when crippled Irish banks were forced to turn to the central bank for large amounts of cash.
A little earlier we drew attention to this quote from the Wall Street Journal:
“We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore.” Read more
Societe Generale has released ‘hard facts’ about its liquidity position on Monday.
Among the points the bank says it has managed to successfully manage a reduction in access to USD funding through a disposal of USD legacy assets, increased use of secured USD funding (repos), EUR/USD swaps and a “reduction in short-term market positions”. Read more
A fortnight is a long time in short-term credit markets.
Reports of US money market funds pulling out of European banks in July abounded last month – and French banks appear to be particularly vulnerable due to their relatively high reliance on short-term funds and lower deposit ratios. Well, the trend continued in August, the FT reports: Read more
Bank of Ireland fell deeply into the red in the first half of the year as higher funding costs wiped out more than a quarter of its net interest income, the FT reports. A 21 per cent fall in bad debt impairments failed to offset the squeeze, leaving Ireland’s biggest lender with a pre-tax loss for the six months to June of €556m, compared with a €116m profit a year earlier. Bank of Ireland said that after excluding exceptional and non-core items, the bank’s loss for the period was €723m, compared with a negative €1.3bn in the first half of 2010. Richie Boucher, chief executive, said: “Funding costs and government guarantee fees continue to place pressure on operating income but our net interest margin is broadly in line with expectations.” The bank’s revenues were also hit by a collapse in the investment performance of its life assurance unit, where a €189m gain a year ago turned into a €115m loss. Mr Boucher blamed the result on the performance of Irish sovereign bondholdings.
Spanish sovereign bond yields have spiked in recent days almost in lockstep with those of Italy – Rome’s heavy public debt burden is the latest target of sceptical investors in the eurozone – and on Tuesday the 10-year yield for both countries exceeded 6 per cent in the nervous secondary market, the FT says. That will mean a sharp rise in the cost of refinancing old debt and raising new money and puts Spain back in line as the country most likely to follow Greece, Ireland and Portugal into a rescue by the EU and the IMF. Eurozone governments are accelerating efforts to bolster their €440bn rescue fund amid further signs that the debt crisis that has threatened the single currency is migrating, the FT reports. Meanwhile, short-term US funding conditions normalised on Tuesday after a Senate vote ratified a debt ceiling deal to cut spending by $2,400bn over the next decade, the FT says. Bloomberg has a summary of repo rates.
That the European Central Bank has stepped in to replace much of the eurosystem liquidity that used to be provided by the banks’ themselves is well-known. Did you know, however, that one measure of the ECB’s liquidity provision is now higher than in the depths of the 2008 financial crisis? Read more
It’s a little over a week until we get the results of Europe’s second round of stress tests.
Here on FT Alphaville we’ve often wondered what’s the point, given that every one seems to think that the assumptions used by the stress test administrators, the European Banking Authority, are too lax. Read more
Notice anything in the below chart, of five-year CDS for Spain, Japan and Australia?
To the sunny climes of Valencia, Spain.
So now we know — the IMF sees European banks through yellow, green and red-coloured glasses:
Recent trends in Exchange Traded Funds (ETFs) could create “potential financial stability issues” says the Financial Stability Board.
We say: about time someone stated the obvious. Read more
The power company at the centre of the world’s worst nuclear crisis in 25 years is tapping Japan’s biggest banks for an emergency loan of up to Y2,000bn ($25bn) as it faces escalating clean-up and rebuilding costs, the FT reports. On Tuesday the Japanese government estimated total rebuilding costs from the twin natural disasters at Y25,000bn – almost 5 per cent of GDP and dwarfing the Y10,000bn spent after the country’s 1995 Kobe quake. While Tepco does not face any immediate funding problems, bankers say the utility is looking to build up an emergency war chest, much like BP did when faced with unknown liabilities following last year’s oil spill in the Gulf of Mexico. Of its $64bn in outstanding bonds, the company is due to repay $4.8bn this year and another $5.6bn in 2012. Reuters, meanwhile, reports that the Japanese government is also looking to pay off the compensation the company will owe to evacuated residents, local farmers and others affected by accident. That figure, they say, could amount to several trillion yen. Tepco will likely forgo its year-end dividend for the first time in 59 years as well.
That’s $29bn for just five banks with derivatives deals covered by one-way credit support annexes (CSAs).
For the entire financial system it might be closer to a whopping $150bn, according to Risk’s clever Duncan Wood. Read more
By Tracy Alloway and Joseph Cotterill
Just how Basel III is Spain’s recently-announced bank recapitalisation plan? Read more
Spanish banks’ funding via European Central Bank repo facilities dwindled late last year as the financials made use of a new (repo) agreement with LCH.Clearnet. Read more
Wednesday is 3-month LTRO day.
This, of course, is otherwise known as the ECB’s Long-Term Refinancing Operation, in which banks get to bid for an unlimited funds for a three-month duration. Read more
FT Alphaville has been researching the issue of so-called ‘liquidity transfers’ ever since we first came across the matter in Life & Pension Risk in October.
As Risk noted at the time, there’s been an increasing trend for banks to swap their illiquid Asset-Backed Securities (ABS)-style assets for much more liquid securities held by pension and insurance funds via extremely long repo arrangements. Read more
You have Moody’s to blame for euro volatility this morning:
A reduction in Spanish borrowing from the ECB can only be a good thing.
Right? Read more
From sub-debt to equity and on to senior debt, then. We’re seeing some selling of Tier 1 European bank paper on Wednesday. The below from Suki Mann at SocGen: Read more
Here it is … the one we’ve been waiting for all Friday.
The Allied Irish Banks’ interim management statement is (finally) out. Read more
Whoops, missed this.
Ireland joined Greece this week in the negative basis club. That is, the five-year asset swap spread for Ireland outpaced movement in equivalent credit default swaps. So (in basic terms) spreads in the CDS market were trading lower than in the cash market for Ireland. Read more
Let’s start with positive news from Friday’s Bank of Ireland trading update.
First, earnings look to be in line or ahead of market expectations and there hasn’t been a large increase in bad debts: Read more
It’s not just the Irish sovereign that’s experienced a — erm — market deterioration.
From Suki Mann, credit strategist at Société Générale: Read more