The European Central Bank's willingness to give European banks unlimited three-year liquidity backed by lower grade securities, could increase centralised funding of the sector by between €150bn and €400bn in February, says Morgan Stanley.
The European Central Bank’s willingness to give European banks unlimited three-year liquidity backed by lower grade securities, could increase centralised funding of the sector by between €150bn and €400bn in February, says Morgan Stanley.
Markets are underestimating the impact of this “to reduce systemic risk and thereby bank and sovereign funding,” the US bank says.
“By reducing the risk of a systemic bank failure in the next couple of years, funding markets for the stronger banks are re-opening. We have already seen European banks issue €46bn [paper], of which €22bn is senior unsecured – more than during the prior six months,” Morgan Stanley analysts said in a research note published today.
“The ECB has significantly reduced the risk of a systemic banking crisis, which we were highly concerned about in the second half of 2011. This is not to say banks won’t still have to raise more equity, conserve capital and shrink loans, but the disorderly risk is materially reduced.”
Morgan Stanley’s analysis came as Commerzbank said today it had already fulfilled 57% of its European Banking Authority capital requirement by December, and would be able to fulfil the requirement by June on its own, by managing risk-weighted assets, further reducing regulatory capital and retaining more earnings.
Separately, Fitch today said Austrian banks faced a “difficult balancing act” to satisfy the EBA demand, in that reducing risk-weighted assets could damage their franchises in central and eastern Europe.
Morgan Stanley calculates Spain’s and Italy’s banks have already pre-funded 50% to 150% of their funding needs this year.
“The first [ECB] long-term repo operation has already taken much funding risk off the table for many Southern European banks.”
“This not only materially reduces the risks around funding for these institutions but should in the near term re-assure corporate depositors who have been running down deposits.
“Also, those banks which didn’t do 100% in the first LTRO indicate to us they may do this in February and many may go beyond just 2012.”
But the US bank also noted Italian and French banks have quadrupled their reliance on the ECB in the past six months.
One of the “difficult long-term issues” for eurozone banks will be how to remove them from their dependence on the ECB.