Bank funding takes the centre-stage

How vulnerable are Europe’s banks? Yesterday, Deutsche Bank chief Josef Ackermann issued the dire (if obvious) prediction that the weak will not survive the gathering storm.

And IMF chief Christine Lagarde has needled her old Eurozone colleagues by repeatedly questioning the solvency of the region’s lenders and demanding that they raise more capital – over and above the €60bn raised so far this year.

The question is where the cash will come from. Equity markets are in a state: one senior banker told City A.M. yesterday that it’s possible that London will not see any more floats this year at all, while share issues look increasingly difficult.

Debt markets are not faring much better. Figures from Dealogic show that net issuance by European banks is now around zero year-to-date. Banks are just about staying afloat in funding terms, selling bonds as they mature.

This means that banks will have to be on their toes to take advantage of any narrow opening in wholesale funding markets, as the recent rush to issue covered bonds illustrates.

And on the other side, they will have to fight to hold deposits. The large players in the market like central banks and big lenders are withdrawing their cash from European banks, to the tune of €461bn from January 2010 to July this year.

So far, that capital flight has been offset by retail and business deposits, which are up overall. But the picture is patchy: in the UK, both kinds of deposit are down, to the tune of €400bn in total.

With capital desperately fleeing risk, banks are in a precarious position: any sign of weakness could bring on a panic. Here’s hope funding markets open up before too long.