We had commented before on the fact that Spanish banks have been going to the ECB for funding because their domestic mortgage securitization market is virtually shut. In December, Spanish banks borrowed €44 billion, more than double the average of the previous 15 months.
The Financial Times story notes two troubling elements: first, that the increase in borrowings is greater than can be explained by the loss of access to the securitization market; second, the banks are presumably using mortgages as collateral for the borrowings, which will delay the securitization market repricing and (hopefully) getting back to normal.
The FT had noted in an earlier article that the Spanish banking regulators had taken a much tougher towards off balance sheet vehicles than many of their peers, so this stress is coming in the absence of large writedowns.
From the Financial Times:
The European Central Bank has effectively funded new lending in Spain in recent months, replacing banks’ use of wholesale capital markets, which have been strangled by the global credit crunch.
Spanish banks doubled their share of the ECB’s weekly funding auctions in the final quarter of last year, taking their borrowing up to €44bn in December from a running average of about €20bn over the previous 15 months, according to the most recent data from the Bank of Spain.
This extra lending from the ECB of almost €24bn outstrips the quarterly amounts raised previously by Spanish banks from securitisation markets, which is an important comparison because the banks have increasingly used mainly mortgage-backed securities as collateral with the ECB…
The Spanish banking system is second only to the UK in Europe in its use of mortgage-backed bond markets and other securitisations to fund lending.
However, the Bank of England did not accept mortgage-backed debt as collateral in similar lending operations until after the run on Northern Rock.
Jean-Claude Trichet, president of the ECB, last week insisted the central bank had not been bailing out banks in Spain, but said there had been a marked increase in use of securitised bonds as collateral by Spanish banks and others.
The big difference is that European banks must re-raise this funding every week and the mortgage-backed bonds pledged at the ECB will have to find their way to the capital markets eventually, which many analysts say could mean markets such as Spain are potentially storing up problems for the future.
While markets for securitised debt remain closed, it is difficult to put a price on European mortgage-backed securities, and banks in the region can be much slower to mark down the value of holdings of such bonds.
By accepting them in exchange for cash, the ECB may be delaying the repricing of risk that analysts believe is necessary for the orderly resumption of markets in such debt.
It’s curious how a more reasoned and focussed take on a story can, in fact, result in it being much more menacing, as is the case here.