Despite the smattering of criticism —form Bundesbank president Jens Weidmann and from Standard Chartered chief executive Peter Sands— Mario Draghi's injection of three-year European Central Bank momey into the eurozone banking system remains widely popular. The second phase of the so-called long-term refinancing operation on Wednesday attracted funding requests from 800 banks for a combined €529.5bn, with Italian and Spanish banks again dominating the take-up of funds.
Although there was no official disclosure from the ECB of who got what, various banks and associations announced a selection of data. Overall, Italian banks accounted for €139bn of the total, with Spanish banks estimated to have been allocated €110-€120bn. One surprise was that half of the banks involved were German, though together they have thought to have accounted for less than €100bn of the funds, suggesting the money went to small regional savings banks.
Two institutions —Italy's Intesa San Paolo and Spain's Bankia— appear to have dominated the auction, taking €24bn and €25bn respectively, almost twice as much as the next tier of banks. The question now is what banks will do with the funds. Many are expected to play a carry trade on their own domestic government debt, making the most on the spread between the 1 per cent interest on the LTRO funds and rates on Italian government bonds, for example, of as much as 5 per cent.
Figures from the ECB showed that banks in Italy and Spain increased their holdings of sovereign bonds in January by about €50bn. There has been a corresponding drop in government's cost of funding since the start of the year. Yields on Italian 10-year debt fell below 5 per cent yesterday for the first time in August, having touched 7.5 per cent last year. There is less confidence about the flow-through of LTRO funds to the 'real' economy. "Credit conditions are still tight in Spain, Italy and Eastern Europe", says Huw van Steenis, analyst at Morgan Stanley.
Funding to Italian business fell by €20bn in December and again in January, though Andrea Belratti, superviserory board chairman at Intesa, suggests there may now be a change of mood. "We think it's a win-win situation from the point of view of the bank", he told the Financial Times, indicating that LTRO funds would be directed both to government bonds and lending to corporate clients.
That win-win could extend to banks' broader funding base, too. The LTRO has led to a pick-up in bank bond issuance after a slow end to 2011 when low confidence led to a dearth of deals, particularly in the senior unsecured market, traditionally the bedrock of the bank funding market. The confidence boost from the LTRO has given investors greater appetite to buy bank paper again, while the fall in government debt yields that accompanied the operations has flowed through to lower banks's own funding costs, too.
In January, there was a surge of issuance in covered bonds —a highly collateralised form of debt— as banks took advantage of improved market sentiment to get deals done and cash-rich investors felt confident enough to recommit to the eurozone. The senior unsercured dent market also re-opened after months of disruption. "Market conditions, partially as a result of the LTRO programme in December, allowed banks to raise senior senior unsecured financing at attractive levels after having limited access in the second halft of 2011", says Chris Tuffey, co-head of European credit capital markets at Credit Suisse.
By February, some of that confidence had split over the southern European countries, which had been in effect locked out of the public markets for months amid the sovereign debt crisis. Led by Intesa and Santander, Italian and Spanish banks have also been keen issuers. "Spanish banks were the most active issuers in February despite also being some of the heaviest takers of ECB liquidity in December", Barclays Capital credit analysts wrote in a note to clients, predicting that the second injection of ECB three-year funding could spur a glut of commercial market bond issuance.
As well as the indirect benefits of the LTRO, some say cheap ECB money is being used by banks to buy other banks' bonds. Nagging worries remain; the exercise does nothing to plug remaining capital deficits at a selection of banks, particularly in Spain and Italy. But with a virtuous cycle of funding helping so many banks in such different ways, the critics of Mr. Darghi's policy seem set to remain in the fringes for some time to come.
Intesa San Paolo [€12.0bn Dec. 2012, €24.0bn Feb. 2013]; Bankia [€15.0bn Dec. 2011, €25.0bn Feb 2013]; BBVA [€11.0bn Dec 2011; €11.0bn Feb. 2012]; UniCredit [€13.5bn Dec. 2012, €10.0bn]; Dexia €20.0bn Dec. 2012; €12.5bn Feb. 2013].
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