THE EUROPEAN Central Bank (ECB) has succeeded in kick-starting bank funding markets, prompting a rush to issue debt that has reached levels not seen since before the latest credit crunch took hold.
Funding costs for banks on the continent have plunged to their lowest level since April on the back of a flood of new loans from the ECB, triggering a frenzy of bond issuance.
Unsecured debt issuance by European banks reached a six-month high of €10.2bn last week, according to data from Dealogic, while a key benchmark of bank debt costs – the three-month European interbank offered rate (Euribor) – dropped to a nine-month low of 1.257 per cent yesterday.
The lion’s share of the unsecured debt – which is riskier for investors than the covered bonds desperate banks had previously been forced to offer – came from Dutch deals. Rabobank raised €5.84bn and state-owned ABN Amro NV (distinct from the RBS-owned part) sold €2.93bn.
The figures show that the ECB’s decision to push €489bn of new three-year funding into banks has had a dramatic impact on investors’ willingness to hold their bonds because they see the European regulator as standing behind the lenders.
The extent of the liquidity support recently prompted former ECB board member Nout Wellink to suggest that the Bank had crossed the line into effectively bailing out some banks.
Many economists agree that the ECB loans are in a grey area between simply keeping credit flowing in tough times and performing a mass bail-out.
“It is lender of last resort-type activity,” says Henderson’s Simon Ward. “It does go beyond traditional liquidity support – towards solvency support. To a level, for three-year loans, it is quasi-capital support.”
And the ECB’s bank lending could also expand dramatically at its next offering of three-year loans in February because the operation will take place under the significantly looser collateral requirements announced by ECB president Mario Draghi last month.
Although his French predecessor had loosened the rules slightly, Draghi went much further in December.
He expanded the ECB’s list of eligible collateral to include asset-backed securities, “the underlying assets of which comprise residential mortgages and loans to small and medium-sized enterprises”.
In effect, that means that dozens of banks could use the ECB to park assets that they can’t shift from their balance sheet because their value has collapsed.
But bank analysts at UBS said: “Central bank funding is not, in our view, a good long-term solution to bank financing – but when the result is an economy once more in recession, the conclusion is not a simple one.”
However, the ECB has been prevented by its legal mandate and German political pressure from embarking upon traditional quantitative easing as a possible solution to shrinking money supply. By contrast, the Bank of England is adopting the opposite approach by buying government debt instead of bank debt.
That approach has drawn criticism from analysts and economists who say that in fact the ECB should engage in quantitative easing while the BoE should step in to UK bank funding markets to counter the effect of harsher regulations, which have increased the cost of their debt.
Newedge’s Bill Blain said: “The rate Barclays paid for two-year money, [the London interbank rate] plus 163 [basis points], was quite extraordinarily high.”
Barclays was forced to issue a supplement to its bond prospectus yesterday in which it warned that the government’s decision to make banks comply with the Vickers banking reforms “as soon as practicable” after 2015 could have an impact on its debt risks.