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The illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in Frankfurt in this April 5, 2011, file photograph. (KAI PFAFFENBACH/KAI PFAFFENBACH/REUTERS)
The illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in Frankfurt in this April 5, 2011, file photograph. (KAI PFAFFENBACH/KAI PFAFFENBACH/REUTERS)

Global Exchange

European banks: new funding fears Add to ...

From the FT's Lex blog



The euro zone’s sovereign debt crisis knows no bounds. The European Central Bank’s disclosure that it had provided $500-million to a bank -- the biggest sum in two years -- shows that one euro zone institution is struggling to raise dollars.



No wonder the Federal Reserve Bank of New York wants to check how big European banks fund their U.S. operations. If traditional funding sources have been spooked by their euro zone debt exposure, the banks might struggle to meet their U.S. obligations.

The New York Fed’s intervention should remind euro zone politicians that their failure to resolve the sovereign debt crisis is a risk to global financial stability.



U.S. money market funds, although a small proportion of overall European bank funding, give an idea of the risk: they have reduced both maturities and funding lines. BBVA and Santander, Spanish banks with U.S. retail units, had a foretaste last year when they struggled to raise dollar funds. This year, as investors fret about Italy’s sovereign risk, it is Italian lenders that are looking for alternative short-term funding as U.S. sources hug the sidelines.

In July alone, their usage of ECB repo lines increased by €40-billion to compensate, Morgan Stanley notes. French banks are also big users of U.S. money funds (perhaps €50-billion for BNP Paribas and €38-billion for Société Générale, the broker estimates) but their ECB usage rose by much less, suggesting they could roll over dollar funding, but perhaps only at shorter maturities.



Italian and French banks are outliers in terms of their overall funding needs. Europe’s big banks have, on average, raised 90 per cent of their 2011 requirement, but need €80-billion more. Italian banks, led by Intesa Sanpaolo and UniCredit, need the most (€16.4-billion). French banks, led by BPCE and Crédit Agricole, are €14.9-billionn short; the UK’s Lloyds Banking Group and Royal Bank of Scotland need €14-billion.



The Fed -- and investors in bank shares -- are right to be worried about funding. Euro zone politicians are still dithering, so it looks as if the ECB’s job has only just begun.



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