Dublin Opinion

Still trying to work out what this actually means, but such a spike in how Irish-based financial institutions fund themselves at a time when lending to the productive economy has flat-lined warrants a closer look.

Going by the Financial Times, It seems that in April 2012 European banks were once again faced with a funding problem and had to return to repo to compensate. The article is quoted below. I pasted it here as the FT is behind a paywall:

May 13, 2012 - Global bank bond issuance falls

Global bank bond issuance has fallen to its lowest level in seven years, underscoring the impact the eurozone crisis and tougher regulatory environment is having on the way banks operate.

Banks have raised just $523bn in the bond markets so far this year, the lowest year-to-date volume since 2005 and well down on the same period last year, according to Dealogic.

The fall in issuance comes as banks around the world are offloading assets, winding down businesses and increasing the amount of money they hold in reserve as they seek to meet regulatory requirements.

In Europe bank issuance of covered bonds and senior unsecured debt – two mainstays of bank funding – has slowed to a crawl after banks loaded up on cheap loans from the European Central Bank.

European banks have raised just $33bn in the capital markets since the start of April. Though they are only half way through the second quarter, this is still a fraction of the $217bn raised between April and June last year.

While the second quarter tends to be quieter than the first, analysts say the European slowdown reflects continued market volatility amid the eurozone crisis as well as the impact of the ECB’s recent longer-term refinancing operations, when banks borrowed more than €1tn.

Spanish and Italian banks used the cheap, three-year loans to buy government bonds, but a huge swath of lenders tapped the LTRO to pre-fund for 2012.

“LTRO financing has helped massively in allowing banks to meet their funding needs for this year and even into next,” says Demetrio Salorio, global head of debt capital markets at Société Générale. “But banks are also experiencing huge deleveraging so they need much less access to the wholesale funding markets.”

Some Northern European banks and a few lenders from the so-called periphery also took advantage of better market sentiment in the wake of the LTRO to tap the capital markets at the start of this year.

Many banks are reporting that they are already almost totally funded for the year. With spreads widening on debt issued in the capital markets, the incentive to issue has diminished.

“Right now the funding markets are almost closed,” says Mr Salorio. However, he expects that as conditions improve banks, including those in the troubled periphery, will need to tap capital markets to demonstrate that they have access to finance and can pay back LTRO money.

The ripple effects of the LTRO have carried across the Atlantic, cutting into new issuance in dollars as well.

Travis Barnes, head of US financial institutions debt capital markets at Barclays, tied fewer banks bond sales this year in the US to a reduction in the amount of so-called Yankee bond issuance, or the sales from banks domiciled outside the US, particularly those out of Europe that have access to the LTRO.

“It is all interrelated,” Mr Barnes said. “We have seen US banks tap the market but it could not make up for the reduction in Yankee supply. Yankee banks have issued about half as much bank debt as they did in 2011.”

Man, they do not make it easy.