27 November 2011

FT: Europe's banks feel funding freeze

European banks have sold $413 billion worth of bonds this year, equivalent to just two-thirds of the $654 billion that is due to be returned to investors in 2011 as the debts mature.

Investors say they have been deterred from buying bank bonds because of uncertainty over the financial health of some banks, the fate of the eurozone and the impact of new financial regulation. The funding freeze has raised fears about the knock-on effects for companies reliant on bank funding and the broader economy.

“Some deleveraging after the financial crisis is clearly needed, but I think banks are being sent on a crash diet that will have wider implications”, said Morgan Stanley analyst, Huw van Steenis. “It’s not just the risk of a European credit crunch, it will have a knock-on effect in Asia and the US.”

Morgan Stanley estimates that banks will have to dispose of as much as $3,300 billion worth of assets over the next few years to meet new regulations on the amount of capital buffers they hold and to address the funding shortfall. The banks’ funding difficulties and shrinking balance sheets are being monitored with mounting concern by the European Central Bank, which is considering a number of new supportive measures. It is worried about the implications for financial stability and the risk of a lending squeeze driving the eurozone deeper into recession.

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