AM | @Mackfinance
The Economist argues that US banks have cyclical problems, but European banks have structural ones. This is the article:
FOR those who worry that a repeat of the crisis of 2007-08 is imminent, this week brought fresh omens. Shares of big banks tumbled; despite a mid-week rally, American lenders are down by 19% this year, European ones by 24% . The cost of insuring banks’ debts against default rose sharply, especially in Europe. The boss of Deutsche Bank felt obliged to declare that the institution he runs is “absolutely rock solid”; Germany’s finance minister professed to have no concerns (thereby adding to the concerns). This is not 2008: big banks are not about to topple. But there are reasons to worry, and many of them converge on one country.
Start with the better news. Banks are more strongly capitalised than they were. Even in Europe, where lenders have been slower than their American counterparts to raise capital, banks have plumped up their core equity cushions from an average of 9% in 2009 to 12.5% in 2015. Managers at European banks are making a renewed effort to adjust to the post-crisis landscape. New rules on everything from capital to liquidity are forcing them to change. John Cryan, Deutsche’s newish co-chief executive, was brought in to trim its investment bank. He is jettisoning whole divisions, and suspended the dividend this year and last. Credit Suisse is undergoing similar surgery. Just now, this is weighing on the banks’ share prices. Yet, however painful for investors, the sensible goal is ultimately to create slimmer, safer, more profitable outfits.
Also salutary, if painful, is how investors in bank debt are coming to understand that they bear greater risk than they did. New European rules that came fully into force at the start of this year stipulate that troubled banks must deal with capital shortfalls by “bailing in” holders of bank bonds before any call is made on the taxpayer. The chance that bondholders might lose money suddenly seems more real. The turmoil at Deutsche this week stemmed partly from fear that the bank might struggle to pay interest next year on a type of bond that is designed to act as a buffer in a crisis. There are some design flaws in the bail-in regime, but the possibility that European banks are at last repairing themselves at a cost to their investors is the silver lining to this week’s spasms.
The clouds, alas, still loom. One source of anxiety is the health of the world economy. The factors that spook markets more broadly—the slowdown in China, plunging commodity prices and indebted energy firms, political upheaval from Greece to New Hampshire—all weigh heavily on banks in particular. Banks do well when the economies they serve are growing, and miserably when they are not. The receding prospect of higher interest rates leaves American banks with less hope of widening the margin between the rates they pay depositors and what they charge for loans. In Japan, where bank shares have fallen by 24% this month, and Europe central banks have imposed negative rates, in effect levying a fee on some reserves—one that banks have not yet been able to pass on to depositors. With the economic outlook growing gloomier, margins being squeezed and restructuring costs still hitting profits, investors have good reason to fret.
Worse, some countries appear to have taken so long to deal with their banks that they will now struggle to clean them up at all. The IMF reckons that the total amount of non-performing debt in Europe was around €1 trillion ($1.13 trillion) at the end of 2014. Bail-in is an especially ugly prospect in countries where bank debt is owned not only by diversified financial institutions but also by local retail investors. Under such conditions, politicians may find that they cannot force the cost of cleaning up balance-sheets on voters without causing uproar.
Rome is where the hurt is
No country is more impaled on this dilemma than Italy. The gross value of non-performing loans makes up a whopping 18% of their total lending; retail investors own some €200 billion of bank bonds, equivalent to 12% of GDP. A government plan to buy bad debts from the banks at close to face value would fall foul of European rules against “state aid”. But selling the loans at a significant discount would force Italian banks to recognise losses, some of which could be borne by retail investors. The prime minister, Matteo Renzi, headed down this road late last year, when the efforts to save four small banks clobbered the savings of individual Italians and seemingly resulted in a high-profile suicide. He will not want to do so again.
The European Union and the Italian government recently agreed on a half-baked alternative to bail-in, though few think it will cleanse banks’ balance-sheets. Instead Italy seems trapped between the rock of hurting small savers and the hard place of a banking system strangled by bad debts. If Mr Renzi cannot negotiate his way round the new rules on bail-in, Italy’s banks and economy risk years of more stagnation, poisoning relations with the EU. Behind this week’s banking headlines is the threat of something very bad coming out of Italy.
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Showing posts with label Bank Funding. Show all posts
Showing posts with label Bank Funding. Show all posts
Friday, February 12, 2016
Saturday, June 8, 2013
ECB MEETING OF GOVERNING COUNCIL: NO CHANGES, AS EXPECTED
The official communiqué: "6 June 2013 - Monetary policy decisions. At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.50%, 1.00% and 0.00% respectively. The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today". Text of press conference: see.
Two things to note: (1) subdued inflation expectations: "The underlying price pressure in the euro area is expected to remain subdued"; (2) the progress made in terms of fragmentation of credit markets within the Eurozone:
It is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs.
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Two things to note: (1) subdued inflation expectations: "The underlying price pressure in the euro area is expected to remain subdued"; (2) the progress made in terms of fragmentation of credit markets within the Eurozone:
It is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs.
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Sunday, March 10, 2013
[BANKS] ON THE ECB'S "SAFETY VALVE"
Nice3 WSJ article on the problems faced by the ECB (*). The "safety valve" has worked, and a complete meltdown has been avoided. But credit is still not flowing to businesses in Southern Europe.
Mario Draghi has toiled to repair the euro zone’s broken
financial engine, fueling banks with cheap loans and installing a safety valve
through an openended bond-buying program. This has calmed financial markets. But the European Central Bank president
still can’t seem to fix the transmission. Until that happens, further rate cuts
or bank- support measures may have little effect. As it is, the ECB is expected
to hold rates steady at 0.75% after Thursday’s monthly meeting.
A cut can’t be
ruled out with inflation below the ECB’s 2% target, at 1.8%, and expected to
fall more in coming months. Even if a cut occurs, though, it wouldn’t do much for countries in Southern
Europe. In healthy economies such as Germany, lower ECB rates feed through the
economy by spurring consumer borrowing and business financing for investment.
Not so in Spain and Italy. Their economies are mired in deep recessions and
unemployment is at euro- era records. Political uncertainty remains high,
especially in Italy. There, risk- averse banks aren’t likely to cut rates for
privatesector clients.
“If the ECB cuts interest rates, it does so to the benefit of Germany but not
Italy, that’s the whole problem with the transmission mechanism,” said
UniCredit’s Marco Valli. The ECB offered a grim reminder of this on Tuesday. Small businesses in
Spain, Italy and Portugal paid much higher rates for loans in January than their
German counterparts, according to a monthly report. Policy makers could try to narrow this gap. One option is to lower the
discounts, or haircuts, that they apply to small- business loans posted by
commercial banks as collateral for ECB funds.
That would encourage banks to extend more of these loans. But the ECB tinkered with collateral rules before with little effect. Relaxing them further may stir the rancor of the bank’s conservative wing, led by Germany’s Bundesbank. That leaves the ECB in a tight spot. Car registrations in Mr. Draghi’s native Italy plunged 17% in February from a year earlier. They were down 12% in France. Until the ECB’s top mechanic finds a way to juice the economy, European households aren’t likely to rev their own spending engines.
(*) Brian Blackstone: "ECB Mechaninc Gropes for Right Wrench", Wall Street Journal, 6 March 2013.
(See also this WSJ editorial, 7 March 2013: "[Recent ECB steps have] helped prevent panic in the bond markets despite the unsettled Italian election result. But preventing disaster isn't the same as promoting growth. The monetary transmission mechanism, whereby ECB policy decisions influence the real economy, remains broken. In the euro area as a whole, household and company borrowing rates are about 1 to 1.2 percentage points higher than might be expected based on Euribor and sovereign-bond yields, based on JP Morgan, with particular problems in Italy, Spain, Portugal and the Netherlands.)
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That would encourage banks to extend more of these loans. But the ECB tinkered with collateral rules before with little effect. Relaxing them further may stir the rancor of the bank’s conservative wing, led by Germany’s Bundesbank. That leaves the ECB in a tight spot. Car registrations in Mr. Draghi’s native Italy plunged 17% in February from a year earlier. They were down 12% in France. Until the ECB’s top mechanic finds a way to juice the economy, European households aren’t likely to rev their own spending engines.
(*) Brian Blackstone: "ECB Mechaninc Gropes for Right Wrench", Wall Street Journal, 6 March 2013.
* * *
(See also this WSJ editorial, 7 March 2013: "[Recent ECB steps have] helped prevent panic in the bond markets despite the unsettled Italian election result. But preventing disaster isn't the same as promoting growth. The monetary transmission mechanism, whereby ECB policy decisions influence the real economy, remains broken. In the euro area as a whole, household and company borrowing rates are about 1 to 1.2 percentage points higher than might be expected based on Euribor and sovereign-bond yields, based on JP Morgan, with particular problems in Italy, Spain, Portugal and the Netherlands.)
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[BANKS] [CREDIT] RUSSIAN BANKS & RENMINBI FUNDING
What a story! Russian banks are funding themselves through the renminbi bond market! How quickly things have changed! Here's a very interesting article by Sarka Halas: "Russian Banks Look to Yuan Bond Market", Wall Street Journal, February 26, 2013.
Russian banks are increasingly selling bonds in the offshore renminbi market as growing investor demand allows them to borrow at cheaper rates and a chance to diversify their funding base. Investors say they are keen to buy the bonds because they are often issued by state-backed, high profile Russian banks and offer an attractive yield and exposure to the Chinese currency.
Russian banks-including JSC VTB Bank, Russian Agricultural Bank OAO and Russian Standard Bank ZA--have already sold the equivalent of $480 million of the bonds this year, compared with just $309 million in the previous three years. Gazprombank OAO, the financing arm of energy giant Gazprom, also issued yuan debt.
The trend illustrates the growing prominence of the offshore renminbi market, which Standard Chartered expects to be worth between 320 to 350 billion yuan ($50.8 to $55.6 billion) in issuance this year, up from last year's record issuance of 267 billion yuan. The bank expects yuan issuance to rise in 2013 on further regulatory liberalization and a more constructive outlook for the currency.
"What's driving this largely is yield, some expectation of currency appreciation and the need for investors to put their renminbi somewhere while they wait," said Edmund Harriss, director at Guinness Asset Management. Mr. Harriss' Renminbi Yuan Chinese Currency Fund bought VTB's yuan bonds, which offered a coupon of 3.8%, in January. The Guinness Atkinson Renminbi Yuan & Bond Fund has $92 million of assets under management.
As well as yield, investors have been drawn to the Russian debt sales because they feel more comfortable giving them their money than some of the more local issuers. "A large percentage of bond issuance in the offshore renminbi market are from either China or Hong Kong, and for European-based investors who might not be familiar with these companies, the risk profile of these issuers may be deemed to be on the high side," said Liang Choon Koh, Nikko Asset Management's Head of Asia Fixed Income. "They [investors] are more comfortable with issuers that have recognizable brand names and those that are investment-grade rated."
Mr. Koh said he looked at all three investment grade-rated issuers from Russia, but declined to say which ones were picked up by the fund. Nikko Asset Management has a total of $154 billion assets under management. VTB, Gazprombank, and Russian Agricultural bank are all investment-grade rated, quasi-sovereign borrowers, with vast experience issuing in the dollar and euro markets. Russian Standard Bank has a high-yield rating, but is the country's biggest lender to consumers and one of the largest privately-owned banks in the country.
Such demand is allowing the banks to borrow at cheaper rates than they would do in the dollar or euro markets. For example, Russian Agricultural Bank sold a three-year one billion yuan ($160.78 million) bond with a yield of 3.6%. It pays 5.3% to investors in the dollar market for debt of a slightly longer maturity of five years. Alan Roch, head of bond syndicate Asia Pacific region at the Royal Bank of Scotland, one of the banks that placed the Russian Agricultural Bank bond, said he was very confident of selling the Russian bank's debt at a discount to the dollar market before his team even visited prospective investors to pitch the sale.
The Singapore-based banker said RBS was seeing growing interest from foreign issuers and Russian names in particular because of an increased need to fund in offshore renminbi, increase depth of demand and investor diversification, and arbitrage opportunities (ability to issue in renminbi and swap back into main currency). "European issuers have been quicker in identifying this and the more that come and issue in renminbi, the more will want to follow, as their comfort on the execution of these deals improves," said Mr. Roch.
Artyom Lebedev, a spokesperson for Russian Standard Bank, said the attractive cost of funding in yuan and the diversification opportunity for the bank's debt portfolio, meant the bank would be keen to sell more debt in the offshore renminbi market. Since being sold, the Russian yuan bonds have performed well on the secondary market. Yields are lower than what was offered when the bonds were sold as the price of the bonds have risen due to secondary market demand.
However, Russian bonds aren't without risk as investors highlight economic and political risk in Russia and stagnant growth in Europe as factors. Mr. Harriss looked at Russian Standard Bank which is not listed, but decided against buying the bank's debt, because the credit risk was too high with weaker profitability and capital ratios combined with an increasing push into consumer lending in Russia.
Nevertheless market participants expect more yuan debt sales from Russia. "If you are an investment-grade rated borrower, you will have no problems because investors are looking for savvier issuers," said Augusto King, who is head of debt capital markets Asia at RBS and based in Hong Kong. "Russian names offer higher yield and investors buying this debt like the outlook of the long-term appreciation of the renminbi and they like the growth outlook for China," said Mr. Koh. Mr. Harriss agrees that better pick up in yield and quasi government status are strong selling points for the bonds, and in the case of VTB - its diversified operations.
Mr. King added that a large amount of yuan bonds were due to be paid back this year, meaning investors would have to find a new home for their money at a time when debt sales from Chinese banks in the offshore market has been low. The yuan market has so far been largely dominated by state-owned Chinese companies and Chinese government entities looking for foreign investors--something they can't do at home because the Chinese bond market is closed to outsiders.
"The pickup in issuance is largely demand-driven, because Asian investors have increased allocations to emerging market debt," said Mikhail Nikitin, Credit Analyst at VTB Capital. He also noted that for Russian banks, selling debt in yuan not only diversified their funding but helped them avoid potential over-supply to Europe and U.S. Among foreign borrowers, the big global companies such as McDonald's Corp., (MCD), Volkswagen AG (VOW.XE), and Caterpillar Inc. (CAT) have all tapped the market in an effort to grow their businesses in China.
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Russian banks are increasingly selling bonds in the offshore renminbi market as growing investor demand allows them to borrow at cheaper rates and a chance to diversify their funding base. Investors say they are keen to buy the bonds because they are often issued by state-backed, high profile Russian banks and offer an attractive yield and exposure to the Chinese currency.
Russian banks-including JSC VTB Bank, Russian Agricultural Bank OAO and Russian Standard Bank ZA--have already sold the equivalent of $480 million of the bonds this year, compared with just $309 million in the previous three years. Gazprombank OAO, the financing arm of energy giant Gazprom, also issued yuan debt.
The trend illustrates the growing prominence of the offshore renminbi market, which Standard Chartered expects to be worth between 320 to 350 billion yuan ($50.8 to $55.6 billion) in issuance this year, up from last year's record issuance of 267 billion yuan. The bank expects yuan issuance to rise in 2013 on further regulatory liberalization and a more constructive outlook for the currency.
"What's driving this largely is yield, some expectation of currency appreciation and the need for investors to put their renminbi somewhere while they wait," said Edmund Harriss, director at Guinness Asset Management. Mr. Harriss' Renminbi Yuan Chinese Currency Fund bought VTB's yuan bonds, which offered a coupon of 3.8%, in January. The Guinness Atkinson Renminbi Yuan & Bond Fund has $92 million of assets under management.
As well as yield, investors have been drawn to the Russian debt sales because they feel more comfortable giving them their money than some of the more local issuers. "A large percentage of bond issuance in the offshore renminbi market are from either China or Hong Kong, and for European-based investors who might not be familiar with these companies, the risk profile of these issuers may be deemed to be on the high side," said Liang Choon Koh, Nikko Asset Management's Head of Asia Fixed Income. "They [investors] are more comfortable with issuers that have recognizable brand names and those that are investment-grade rated."
Mr. Koh said he looked at all three investment grade-rated issuers from Russia, but declined to say which ones were picked up by the fund. Nikko Asset Management has a total of $154 billion assets under management. VTB, Gazprombank, and Russian Agricultural bank are all investment-grade rated, quasi-sovereign borrowers, with vast experience issuing in the dollar and euro markets. Russian Standard Bank has a high-yield rating, but is the country's biggest lender to consumers and one of the largest privately-owned banks in the country.
Such demand is allowing the banks to borrow at cheaper rates than they would do in the dollar or euro markets. For example, Russian Agricultural Bank sold a three-year one billion yuan ($160.78 million) bond with a yield of 3.6%. It pays 5.3% to investors in the dollar market for debt of a slightly longer maturity of five years. Alan Roch, head of bond syndicate Asia Pacific region at the Royal Bank of Scotland, one of the banks that placed the Russian Agricultural Bank bond, said he was very confident of selling the Russian bank's debt at a discount to the dollar market before his team even visited prospective investors to pitch the sale.
The Singapore-based banker said RBS was seeing growing interest from foreign issuers and Russian names in particular because of an increased need to fund in offshore renminbi, increase depth of demand and investor diversification, and arbitrage opportunities (ability to issue in renminbi and swap back into main currency). "European issuers have been quicker in identifying this and the more that come and issue in renminbi, the more will want to follow, as their comfort on the execution of these deals improves," said Mr. Roch.
Artyom Lebedev, a spokesperson for Russian Standard Bank, said the attractive cost of funding in yuan and the diversification opportunity for the bank's debt portfolio, meant the bank would be keen to sell more debt in the offshore renminbi market. Since being sold, the Russian yuan bonds have performed well on the secondary market. Yields are lower than what was offered when the bonds were sold as the price of the bonds have risen due to secondary market demand.
However, Russian bonds aren't without risk as investors highlight economic and political risk in Russia and stagnant growth in Europe as factors. Mr. Harriss looked at Russian Standard Bank which is not listed, but decided against buying the bank's debt, because the credit risk was too high with weaker profitability and capital ratios combined with an increasing push into consumer lending in Russia.
Nevertheless market participants expect more yuan debt sales from Russia. "If you are an investment-grade rated borrower, you will have no problems because investors are looking for savvier issuers," said Augusto King, who is head of debt capital markets Asia at RBS and based in Hong Kong. "Russian names offer higher yield and investors buying this debt like the outlook of the long-term appreciation of the renminbi and they like the growth outlook for China," said Mr. Koh. Mr. Harriss agrees that better pick up in yield and quasi government status are strong selling points for the bonds, and in the case of VTB - its diversified operations.
Mr. King added that a large amount of yuan bonds were due to be paid back this year, meaning investors would have to find a new home for their money at a time when debt sales from Chinese banks in the offshore market has been low. The yuan market has so far been largely dominated by state-owned Chinese companies and Chinese government entities looking for foreign investors--something they can't do at home because the Chinese bond market is closed to outsiders.
"The pickup in issuance is largely demand-driven, because Asian investors have increased allocations to emerging market debt," said Mikhail Nikitin, Credit Analyst at VTB Capital. He also noted that for Russian banks, selling debt in yuan not only diversified their funding but helped them avoid potential over-supply to Europe and U.S. Among foreign borrowers, the big global companies such as McDonald's Corp., (MCD), Volkswagen AG (VOW.XE), and Caterpillar Inc. (CAT) have all tapped the market in an effort to grow their businesses in China.
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Friday, March 8, 2013
[MONETARY POLICY] EARLY EFFECTS OF LTRO (March 2012)
[Old but useful info!] A very interesting and prescient Financial Times article by Patrick Jenkins, Mary Watkins and Rachel Sanderson (FT, Friday Marc 2 2012):
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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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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