From ICAP Research’s Chris Clark, a chart that shows the net change in the EURUSD basis swap rate in the past week Friday, February 24 – Friday, March 2:
The average maturity of a euro of liquidity provided by the ECB on December 1 was 46 days. Today [March 5] it is 942 days, an increase of 20 times
– Lorcan Roche Kelly of TrendMacro, on the ‘time quality’ of €1.1tn LTRO funding Read more
Banks deposited a record €821bn over the weekend at the European Central Bank after the bank last week injected a second wave of funds into the eurozone banking system, the FT reports. On Wednesday the ECB announced that 800 banks had borrowed €529.5bn in the second phase of a cheap three-year loan programme being offered by the central bank, a move aimed at easing funding pressures on eurozone lenders. In total lenders have borrowed more than €1tn from the ECB at a rate of 1 per cent under its three-year longer-term refinancing operations (LTRO) in February and December. On Thursday night, ECB overnight deposits rose to €776.9bn, also a record. Following December’s LTRO deposits in the ECB’s overnight facility also jumped, hitting about €450bn at the end of the year. Some suggested that the high level of funds being kept at the ECB is a sign of market tension and an indication that banks are opting for safety, given that the ECB’s overnight deposit facility only earns an interest rate of 0.25 per cent. However, others pointed out that it would be impossible for banks to redeploy that level of capital so quickly.
Banks including Barclays, Lloyds and Credit Agricole will use funds they borrowed from the ECB’s three-year liquidity operation to prop up subsidiaries in the economies of the eurozone periphery, the WSJ reports. Barclays’ Spanish and Portuguese units tapped funding in the February LTRO, while Credit Agricole partly borrowed through its Greek offshoot. In getting subsidiaries to fund from the ECB in this way, parent banks will be able to limit exposure to the units if the local economies falter, or even leave the euro altogether. Meanwhile, there are fears that banks will use LTRO cash to redeem so much bank debt in the next year that corporate debt markets could sharply contract, says the FT.
Yeah, we knew the LTRO-inspired rally would make it easier for European banks to start closing the gap between their capital ratios and those required by the EBA – or at the very least, as in the case of Commerzbank, embolden them to announce big plans for doing so.
The EBA — remember all that tough talk last October about monitoring banks closely to make sure the recap was asset sales-light and capital raise-heavy? — is amusingly eager to disavow credit for any recent improvements. Just banks doing their thing, especially if by “their thing” one means “breathing easier now that they’re allowed to pledge dirty skivvies to fund themselves, and shareholders are off their backs for the moment”. Whatevs. Read more
Yes, the ‘hoarders’ are back. From Dow Jones: Read more
Eight hundred European banks borrowed €529.5bn in three-year liquidity from the European Central Bank in the last LTRO, the FT reports. More than half of the banks tapping funds came from Germany, according to people familiar with the auction. But Italian lenders also took down €130bn of funds in return for collateral, with Spanish borrowing also likely to be heavy, Reuters says. FT Alphaville has a list of individual lenders who revealed their involvement, and the amount borrowed. The ECB is apt to watch for whether the funds are used to lend to the real economy or to refinance bank debts.
Not all 800 banks who tapped the ECB’s second three-year liquidity op — obvs. But…
[DJ] Intesa Sanpaolo Took Up EUR24B Of ECB’s LTRO – CEO Read more
That’s €530bn with 800 bidders — 277 more than participated last time, when the uptake was €489bn.
The below is from the FT’s Money Supply blog that covers all things central banky.
The ECB’s exposure to peripheral sovereign debt and a host of other assets of dubious quality has sparked concerns about the central bank’s solvency. Read more
That wasn’t quite our last pre-LTRO/Ltro/L-Troh post.
On Tuesday Marc Chandler, global head of currency strategy at Brown Brothers Harriman, ventured an interesting hypothesis on what the market’s response might be to the LTRO-II take-up, in relation to the consensus expectations of roughly €500bn. Read more
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:
Or, the Goldilocks Ltro — euro bears edition.
Too much liquidity, the euro jumps — but then falls. Too little, it just falls. Anyway, that’s the interesting view from the friendly bears over at Morgan Stanley. Read more
Yes, “L-troh”. So ubiquitous is the ECB’s three-year liquidity op getting that we’re turning the acronym into a word. Like Nato or Isda. So sue us!
With the second three-year Ltro on Wednesday, the release from the burden of the acronym has come just in time for another bout of guesswork on how ‘big’ it will be, and just what the ECB’s funding will be used for. Read more
The covered bond LTRO carry trade. Pretty attractive in December. Not so much now.
That at least, is the view of Leef Dierks at Morgan Stanley on Friday. Read more
Exhibit one, the Greek default.
The European Central Bank will not take losses on Greece. It will not even have to do anything tricky with ‘purchase prices’ etc under the latest bailout deal. The ECB simply hands over profits on the bonds that it makes over time (accrued coupons, “pull to par”, so on) to eurozone governments – a perfectly normal operation – who can then commit the (pretty meagre) proceeds to Greece. Read more
It’s understandable why the introduction of a two-year collateralised credit facility as well as the expansion of the range of eligible collateral accepted by Hungary’s central bank, the Magyar Nemzeti Bank (MNB), might have been confused for the Hungarian version of the ECB’s LTRO.
But, says Nomura’s Peter Attard Montalto, this would be a misnomer. Read more
Courtesy of the European economics team at UBS…
We missed Willem Buiter’s comments on “additional credit claim” ECB collateral when they were published on Monday. But since it’s pretty strong stuff from the Citigroup economist…
(Might need a key. ELA = emergency liquidity assistance. GC = General Council. Rouble zone = background here; byword for monetary disintegration, basically.) Read more
The point has been made before that rising deposits at the ECB do not, (repeat, not) indicate that banks are “hoarding liquidity”.
Here’s Guy Debelle, assistant governor at the Reserve Bank of Australia, on the subject, in a speech made earlier on Tuesday: Read more
Leading hedge funds have profited heavily from a rally in European banking stocks in recent weeks and are wagering that their gains will continue amid fresh measures to inject liquidity into the financial system from central banks, says the FT. This year has seen some of the strongest performance numbers from equity-focused hedge fund managers since 2009. The average equity long/short hedge fund returned 3.8 per cent in January and is provisionally up 1.6 per cent for February, according to Hedge Fund Research. Bets in banks such as Italy’s UniCredit, Spain’s Santander and the UK’s Barclays have made some hedge funds millions. Among big hedge fund gainers in the past six weeks have been Toscafund, run by the former Tiger Management star trader Martin Hughes, which has seen its flagship fund gain 7 per cent. A more specialist fund run by Mr Hughes himself is up more than 18 per cent. Crispin Odey’s flagship European hedge fund rose 14.7 per cent in January alone while Lansdowne Partners saw its flagship UK fund rise 5.7 per cent. Fund managers are unequivocal that it has been the European Central Bank’s Long Term Refinancing Operations lie behind their gains.
Just as “free lunch” appears in a Bloomberg headline on the ECB’s three-year liquidity…
Here’s a pair of interesting analyst reactions to Friday’s details on eurozone central banks’ rules for accepting additional credit claims. It’s an expansion of eligible ECB collateral. But neither a free lunch – nor a source of easy carry – given the haircuts these assets (bank loans, from French real estate to Spanish public sector to Italian lease finance to Austrian SME, etc) will bear, it seems. Read more
Mario Draghi has run into Bundesbank resistance over easing access to ECB offers of three-year liquidity for eurozone banks, reports the FT, highlighting German unease over the measures the ECB president has taken to turn the region’s fortunes. The ECB’s 23-strong governing council gave the go-ahead on Thursday for seven national central banks to expand the assets that can be used as collateral when obtaining liquidity. The rule changes would temporarily allow the broader use of bank loans, boosting by about €600bn the pool of assets that can be used as collateral in ECB operations, before haircuts were applied. However, Jens Weidmann, Bundesbank president, voiced concern about a lowering of credit standards and Mr Draghi admitted the council decision had not been unanimous. The Bundesbank’s concern is significant because Mr Draghi has tried to repair the damage created by conflicts with sceptical German policymakers over eurozone crisis measures under Jean-Claude Trichet, his predecessor.
Some interesting points about the ECB’s expansion of the collateral it will accept for funding at February’s three-year LTRO, plus a bit on its Greek bonds, from ECB President Mario Draghi at pixel time…
(“New collateral” = credit claims, or bank loans, which national eurozone central banks will accept, and bear risk on, under the revised rules. Draghi said that the ECB would publish further rules at 1500 GMT. We’ll post when we get them. Update -- see below!) Read more
From Icap’s latest repo weekly report:
Intesa Sanpaolo’s chief executive says he’ll use ECB funds to buy Italian bonds…
BBVA sells the first senior unsecured bond to be issued by a Spanish bank since October… (like Intesa a few weeks ago. Both with unusually short – 18-month – maturities, however) Read more
Seems kinda churlish to throw this out amidst the biggest bank bond rally since 2009. But…
We believe investors should assume a low (possibly 0%) recovery rate on most senior unsecured bank bonds Read more
Deutsche Bank has risked a clash with the European Central Bank by indicating it sees a stigma attached to the long-term help offered to banks to try to ease the eurozone’s funding crisis reports the FT. Josef Ackermann, chief executive, made clear that Deutsche might not take up the ECB’s next offer of unlimited three-year loans because it might be seen as tantamount to government aid that could damage the bank’s reputation. Mr Ackermann said Deutsche had not taken part in December and was reluctant to be seen as needing help. “The fact that we have never taken any money from the government has made us, from a reputational point of view, so attractive to so many clients in the world that we would be very reluctant to give that up,” Mr Ackermann told analysts on Thursday. Mr Ackermann also said: “I’m normally not a friend of carry trades and I don’t think we would borrow money to buy sovereign risks even if there is an attractive spread.”
Just one name today, but hopefully it rams home why banks are using the ECB’s three-year liquidity. From BBVA’s latest results:
Making use of the new lending facility provided by the European Central Bank (ECB), BBVA took up €11,000m at the extraordinary 36-month auction on December 21. This figure is equivalent to the sum of its wholesale debt redemptions for 2012. It means that the Group has “liquidity coverage” and demonstrates its prudence in liquidity risk management in line with the profile of maturities in upcoming years. However, it does not imply that the Group will not issue debt in 2012 if conditions improve. Read more
European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze, the FT reports. Several of the eurozone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29. “Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.” Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold. Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold.