I regard the new 3y Tender by the ECB (first one to be conducted this Wednesday and the next one in February) as an extremely positive development. The unlimited fixed-rate tender provides the banks with the option to redeem all or part of the acquired liquidity in 1 years’ time. Hence, banks keep flexibility over their collateral usage. More importantly, the ECB eased collateral standards (ABS down to A rating are eligible as are loans to small and medium sized enterprises).
I see the following main advantages of this tender:
1. During the next year a significant amount of bank bonds will reach maturity (around EUR 800bn).
Approximately one quarter of this are government guaranteed bonds which were
issued after the Lehman bankruptcy and carried an original maturity of around 3
years. Currently, banks face a very difficult environment to issue bonds (even
for covered bonds) and most likely would need to revert to a new scheme of
government guarantees. However, in those countries where even the sovereigns
face a challenging environment to issue bonds, government guarantees would
provide only a limited insurance function. However, as banks can now fund
themselves for 3 years at 1%, this ECB tender should go a long way in easing
the refinancing burden during 2012. It secures medium-term bank liquidity at a
very low rate. Furthermore, it eases the pressure for governments as the likely
size of needed government guarantees drops. Hence, via this tender, the
liquidity provision for banks via sovereigns is being substituted by the ECB!
2. Banks can fund illiquid SME loans at extremely favourable conditions (1% at present). The
drawback though is that the necessary legal paperwork so far has apparently not
been finished yet and hence it is not clear whether this applies already for
this week’s tender or only for the next one in February. This has several
effects. For one, banks don’t need to fund these loans anymore in unsecured
markets. Hence, it takes the pressure of unsecured funding markets.
Furthermore, it increases the positive carry of the bank loan book as funding
costs drop sharply. Finally, it frees higher-quality collateral which banks can
use for other secured transactions.
3. The refinancing costs for Eurozone banks should fall sharply (as they fund an increasing part of
their balance sheet at 1%). This increases realized margins and should help to
restore equity over time, improving bank solvability.
I am convinced that the easing of banks’ funding pain is also behind the improvement in the short-end
dynamics of the Eurozone periphery over the past week. Especially for small and
midsized banks which a) are not part of the EBAs Stress Tests and b) hold large
shares of SME loans, this tender should significantly reduce the need to
deleverage and on the margin improve the demand for (domestic) government
bonds, especially those that trade above 1% yields and mature in around 1-3
Overall, I expect the two tenders to result in a very large take-up by Eurozone banks. However, it is
likely that the February tender will be significantly larger given that so far
the necessary legal paperwork for accepting bank loans seems not to be
finalised yet. However, I do not think that this action is enough to break the
adverse feedback loop and the real test will happen from around mid-January
onwards, when the sovereign funding spree starts in earnest.
I wish all my readers a happy festive season and a good start for 2012!