The party line is everything is fine in bank land….even Eurobank land. But some recent developments suggest otherwise.
The business news on Europe has pretty much daily updates on the unfolding and linked sovereign debt/ bank solvency crisis. The officialdom insists this looming problem can be resolved but most observers think it can’t be in the absence of a fiscal union, which is a political bridge too far right now.
In a not-widely-noticed replay of pre-crisis conditions, the cost of swapping euros into dollars to the same high level observed last May, when sovereign crisis fears were at a peak. This is of concern because European banks have a dollar funding gap, meaning they will come under liquidity stress if they cannot roll dollar funding. And the friendly ECB cannot solve this problem unassisted; the ECB can only provide Euro funding.
As the Financial Times noted earlier in the week:
European banks currently have an estimated funding gap of about $500bn, which means they have to raise this amount from the markets to fund dollar loans, meet swap arrangements and pay for trading book transactions that require the US currency. The dollar funding gap was estimated at more than $1,000bn at the time of Lehman’s bankruptcy.
The Institute of International Finance, which represents more than 400 financial services groups around the world, warned in a report last week that some European banks appeared to be facing dollar funding pressures…
The effects of the end of the year – when banks are more reluctant to lend to rivals as they want to protect their own balance sheets – have also pushed up the costs of swapping euros for dollars. However, dollar swap lines opened up between the ECB and the US Federal Reserve have eased pressures.
Not surprisingly, the Fed has extended the currency swap lines, due to expire in January. Per Bloomberg:
The Federal Reserve authorized the extension through Aug. 1 of its temporary dollar liquidity swap arrangements with the European Central Bank and the central banks of Japan, Canada, Switzerland and the United Kingdom…
“Global tensions have worsened over the past week because of Ireland’s crisis,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “It doesn’t solve the problem but it’s helping soothe symptoms.”…
The ECB said U.S. dollar liquidity-providing operations will continue to have a maturity of seven days and take the form of repurchase operations against eligible collateral. They will be carried out as fixed-rate tenders with full allotment, the ECB in Frankfurt said in a separate statement.