The European sovereign-debt crisis placed new strains on the Continent’s banks on Wednesday amid signs that some lenders are finding it harder and more expensive to fund themselves.
The cash crunch for some European Union banks underscores the challenges that central bankers and regulators face in preventing the bloc’s economic and debt problems from seeping into the bank-funding markets.
The barometers that central banks and analysts use to monitor stress aren’t showing extremely heightened levels. But certain gauges are flashing warning signals: Bank funding from the European Central Bank increased and European banks and corporations have had to turn to the currency markets for dollar funding, instead of borrowing from one another or selling debt.
In countries like Spain and Italy, banks face the added difficulty of having to deal with a recent sharp drop in the values of government bonds that form the mainstays of their balance sheets.
In a report last month, the Committee on the Global Financial System, a central-bank oversight panel, said that an increase in „sovereign risk adversely affects banks’ funding costs through several channels, due to the pervasive role of government debt in the financial system.”
A drop in the value of government debt, the panel said, could weaken bank balance sheets and make it more difficult to obtain funding or use the debt as collateral.
Many European banks have responded to the latest difficulties by hoarding cash. In one proxy of bank anxiety, banks are stashing money at the European Central Bank’s ultrasafe but low-interest-rate overnight deposit facility, effectively taking funds out of the banking system. Nearly €105 billion ($149 billion) was parked at the facility on Tuesday, the highest level since February, compared with €86.6 billion a day earlier.
At the same time, banks appear to rely more and more on the ECB for short-term funds, another signs of stress.
The ECB’s one-week refinancing facility saw borrowings rise to €172 billion from €164 billion. While the increase might seem small, it is significant because at this time of the month demand for borrowings generally would decline, said Irena Sekulska, a fixed-income strategist at Nomura International PLC.
„This takeup was really surprising,” she said, calling it a worrisome development. „It could reflect that some euro-zone banks can’t fund in dollars.” Other analysts pointed to the increase in ECB borrowings as a factor rattling investors on Wednesday.
To further complicate matters, many banks are reporting earnings this week, and investors don’t like what they are seeing.
In Italy, one of the country’s biggest banks, UniCredit SpA, faced numerous questions from analysts about the bank’s short-term loans and whether disruptions in the funding market pose a threat. Executives acknowledged the market turmoil was having an impact, but downplayed its severity.
„Liquidity…is available in the market. It’s very, very short [term], but available,” one senior executive said.
Short-term funds typically are less stable and more expensive than longer-term commitments, one of the reasons why banks and regulators try to limit their reliance on short-dated funds.
In France, Société Générale SA spooked investors Wednesday when it reported lackluster second-quarter results, with profits down 31%, and backed away from its previous profit targets. The bank cited the turmoil caused by the financial crisis in Greece, where it owns a local bank. Société Générale’s shares plunged 9%.
While European financial institutions have continued to borrow using repurchase agreements, or repos, it has become difficult for them to borrow by issuing bonds.
„We have seen very little issuance for two months now even from the biggest Spanish banks and Italian banks,” said Nikolaos Panigirtzoglou, J.P. Morgan Chase & Co.’s European head of global asset allocation and alternative investments. „In a way, that’s a concerning sign.”
In the currency markets, the cost for European banks and corporations to obtain dollars in return for euros has increased in recent days, though it remains far below the crisis level seen in 2008. The cost is underpinned by a global bank-borrowing gauge called the London interbank offered rate, or Libor.
The cost to exchange euros for dollars, and then unwind that trade in three months through a derivatives transaction, hit 0.63 percentage point above three-month dollar Libor this week and fell slightly to 0.56 percentage point above Libor on Wednesday. That is an increase from the beginning of the year when the cost calculation was about 0.10 to 0.15 percentage point. The cost in 2008 hit a two-percentage-point level.
The cost effectively measures foreign demand for dollars. Jim Caron, global head of interest-rate strategy at Morgan Stanley, said the increase is a sign that European banks and companies are having to find new avenues for dollars given that U.S. money-market funds are less willing to fund them through the market for short-term loans known as commercial paper.
„Banks have many avenues through which to obtain short-term funds, and when one or more of these sources begins to run dry, the others become squeezed further,” Mr. Caron said in a report this week.
The funding pressures come amid a large stockpiling of dollar reserves at foreign banks in what had been viewed as an accumulation of liquidity. The U.S. branches of foreign banks have nearly tripled their dollar holdings, from $374 billion at the beginning of the year to more than $1 trillion in late July.
The stockpiling of cash could be a sign of worry among European banks of troubles they fear could come. U.S. regulators are watching the European situation, especially because of the exposure of U.S. money-market funds to European banks.
If U.S. dollar funds become scarce for foreign banks, they potentially could use a swaps program between the Federal Reserve and the ECB as a source of funding. Under this program, the Fed makes U.S. dollar loans to the ECB, which can in turn lend dollars to European banks that need dollars. The program was used heavily during the financial crisis, but as of July 27 it had been untapped.
sursa: Wall Street Journal
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