Many Banks in Europe Face Funding Difficulties

Sources:
Economist: Cutting It Fine
Bloomberg: European Bank Funding Threatened as Basel III Meets Solvency II
FT: Banks Endorse Option of Creditor ‘Bail-in’; Brussels to Target Bondholders on Bail-outs

In many European countries, the maturities of bank debt have shortened dramatically in 2011 compared to 2006, according to data provided by Dealogic. In particular, in countries having sovereign-debt problems such as Greece and Portugal, the maturities of bank debt have fallen more sharply. In other countries such as Spain and Italy, banks also face funding difficulties and have been issuing more short-term bonds or paying higher yields. In the case of Italy, banks pay higher yields on their bonds by 1-1.5 percentage points than banks in France and Germany. Having more short-term funding is worrying because it makes banks vulnerable to a sudden liquidity dry-up in short-term funding markets as it happened during the recent global financial crisis.

On the other hand, banks in some countries including France and Germany have been able to improve their funding situations, issuing more long-term bonds during the same time period. In France, for instance, banks’ weighted-average debt maturity in 2011 increased over eight years from around six years in 2006.

However, most banks in euro-zone countries will likely continue to suffer from funding difficulties in the near future as new regulations pose additional challenges. The new Basel III rules require banks to hold more capital. McKinsey & Co. estimates that banks in euro-zone countries will have to raise additional €2.3 trillion ($3.4 trillion) in long-term funding. However, other two regulations imposed by European regulators may make it even harder for banks to sell long-term bonds. First, under the Solvency II rules, insurance companies are required to hold more capital against corporate bonds when they purchase longer-term bonds. Insurance companies are the biggest purchasers of bank bonds in Europe, holding about 60 percent of banks’ debt. The Solvency II rules may discourage them to hold longer-term bonds. Second, European regulators have proposed a regulation which requires bondholders to share the losses of failing banks. Under the proposed rules, bondholders will be first asked to reduce the value of their bonds before taxpayers bail them out.