Crunch awaits world's banks with trillions due

Jul 13, 2010

FRANKFURT: The sovereign debt crisis would seem to create worry enough for European banks, but there is another gathering threat that has not garnered as much notice: the trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years.
The European Central Bank (ECB), the Bank of England and the International Monetary Fund have all recently warned of a looming crunch, especially in Europe, where banks have enough trouble raising money as it is.
Their concern is that banks hungry for refinancing will compete with governments - which also must roll over huge sums - for the bond market's favour. As a result, credit for business and consumers could become more costly and scarce, with unpleasant consequences for economic growth.
'There is a cliff we are racing towards - it's huge,' said Mr Richard Barwell, an economist at Royal Bank of Scotland and formerly a senior economist at the Bank of England, Britain's central bank. 'No one seems to be talking about it that much.' But, he added, 'it's of first-order importance for lending and output'.
Banks worldwide owe nearly US$5 trillion (S$6.9 trillion) to bondholders and other creditors that will come due in 2012, according to estimates by the Bank for International Settlements (BIS). About US$2.6 trillion of the liabilities are in Europe.
US banks must refinance about US$1.3 trillion in 2012. While that sum is nothing to scoff at, analysts seem most concerned about Europe because the banking system there is already weighed down by the sovereign debt crisis.
How banks will come up with the money is an open question. With investors worried about government over-indebtedness in Greece, Spain, Ireland and other parts of Europe, many banks have been reluctant or unable to sell bonds, which they typically use to raise money that they lend, on to businesses and households.
The financing crunch has its origins in a worldwide trend for banks to borrow money for shorter periods.
The practice of short-term borrowing and long-term lending contributed to the near-collapse of the world financial system in late 2008 when short-term financing dried up. Banks suddenly found themselves starved for cash, and some would have collapsed without central bank support.
Government bank guarantees extended in response to the crisis also inadvertently encouraged short-term lending. The guarantees were typically only for several years, and banks issued bonds to match.
Other banks took advantage of the gap between short-term and long-term rates, borrowing cheaply from money markets or central banks and lending to their customers at higher, long-term rates.
A study in November by Moody's Investors Service found that new bond issues by banks during the past five years matured in an average of 4.7 years - the shortest average in 30 years.
Since then, worries about Greek and Spanish debt and whether Europe is headed for another recession have caused new problems. Investors are unsure which institutions are in good shape and which are sitting on piles of bad loans and potentially tainted government bonds.
Bond issuance by financial institutions in Europe plunged to US$10.7 billion in May, compared with US$106 billion in January, and US$95 billion in May last year, according to Dealogic, a data provider. New issues have recovered somewhat since, to US$42 billion last month and US$19 billion so far this month.
Bank stress tests being conducted by European regulators could help if they succeed in convincing markets that most banks are healthy.
Bank regulators plan to release the test results, covering 91 large banks, on July 23.
Mr Sandeep Agarwal, head of financial institutions debt capital markets in Europe at Credit Suisse, predicted that the market could be separated into haves and have-nots, with healthy banks raising money fairly easily but weaker banks being required to pay a premium.
'There is cash at the right price for many institutions, not all institutions,' Mr Agarwal said.
That could add pressure on the weakest banks to merge, seek government help, or scale back their activities. Some might even fold.
The Landesbanken in Germany, savings banks in Spain or other institutions that have struggled may be forced to confront difficult choices.
A shortage of bank finance also could create quandaries for the ECB, which appears anxious to wean banks from the cheap cash that it began providing in the heat of the global financial crisis.
If institutions are unable to raise the money that they need on the open market, the ECB would have to decide whether to continue to prop them up.
'Banks that have trouble tapping new funding sources will have to shrink,' the BIS said in its annual report late last month. The BIS brings together the world's main central banks.
Mr Jean-Francois Tremblay, a Moody's vice-president who has studied the refinancing issue, said that so far banks had managed to roll over debt better than expected.
They have increased customer deposits, drawn on cash from central banks, or simply reduced their lending and their need for new financing - which is exactly what some economists feared.
NEW YORK TIMES