Global bank debt offerings plummet to dismal levels

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Here in Canada we live in quite the bubble, financially speaking.

Our banks are heralded as a success, their stocks are still strong and they can tap the debt markets pretty much whenever they so choose.

So it's easy to forget that outside our borders the financial landscape looks vastly different. Case in point: a new report from Moody's Investors Service found that bank debt issues around the world have been chopped in half since the onset of the financial crisis. After peaking at roughly $2.4-trillion (U.S.) a quarter in 2007, banks globally are now issuing unsecured debt that amounts to just half that.

First it was North American issues – chiefly the U.S. – that plummeted in 2008 and 2009, and more recently it's been European banks, particularly those on the periphery of the euro zone. The only area of the world seeing an uptick in issuance right now is Asia, where long-term bank debt issues are up 6 per cent over the 12 months ended Sept. 30. (Canada on its own is also faring well.)

The drop-off has a few implications. Chiefly, it affects how much money the banks can lend. For that reason, it's sparked a push for deposits as a cheap source of funds. Moody's noted that Asian banks, and "to a lesser extent, North American ones have been far more successful in this endeavour than their European peers."

The slowdown also gives the banks an incentive to ramp up their covered bond offerings. These issues are still attractive because covered bond spreads are much more attractive for issuers than those for pure bank debt, as the bonds are backed by both the bank issuing them and a pool of mortgages.

To understand just how much covered bond spreads have tightened, making them more favourable, in 2009 they blew out to roughly 240 basis points in the U.K. Now they're back to about 60 basis points.