| Title of Document: |
A.M. Best Special Report: European Banks Juggle Funding & Liquidity Needs |
| Keywords: |
funding and liquidity, capital in positioning the industry |
| Author: |
A.M. Best Company, Inc. |
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| Codex-Insurance publication date: 01/12/2010 |
| Date of Original Publication: 01/12/2010 |
| Country: EU |
Summary: European banks face significant challenges in managing funding and liquidity (F&L), which are at least as important as the amount and quality of capital in positioning the industry to meet future financial crises. Banks are competing for finite sources of funding amid the current recession, and costs are higher, putting pressure on profitability even as loan losses are mounting. |
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-- Liquidity provided by national governments and central banks has safeguarded banks' short-term positions, but restoring prudent F&L profiles will be challenging and take several years.
-- Senior bank managers and regulators must act quickly to wean the sector off central banks' funding and back to the wholesale market.
-- Despite growing talk of a recovery, there is a lingering lack of liquidity in the financial markets, which is vital to the increased lending needed to help revive Europe's economy.
-- A.M. Best Co.'s analysis of the 10 largest European banks by assets shows their F&L profiles became exposed to market disruption due to rapid growth in loans; rising use of cheap, abundant wholesale funding; decreased holdings of government bonds; and increased usage of securitisation.
-- Since 2007, securitisation activity is down sharply, with most bank securitisations retained on balance sheet for collateral in obtaining funds from central banks.
-- The European banking sector currently is pursuing three main themes: Increased focus on retail deposits and reducing wholesale funding; reduction in balance sheets and loan growth; and extension of maturity of market funding.
-- A.M. Best expects loans-to-deposit ratios (LDRs) to be decreasing over the coming years, but about EUR 180 billion in additional deposits need to be raised to return the LDR to near 100%.
-- The resulting competition for deposits will pressure deposit interest rates, although there has already been significant compression in Europe in the spread between interest earned on loans and deposit rates.
-- Private sector funding clearly needs to replace central bank funding for the banking sector to begin operating as stand-alone institutions again and with the necessary confidence of the market.
-- The volatile commercial paper market means banks must extend the maturity of their wholesale funding, which is more expensive and will be passed on to borrowers.
Press Release of A.M. Best Company, Inc.
Source:http://www3.ambest.com/frames/frameserver.asp?site=press&tab=1&altsrc=14&altnum=&refnum=65494653774946496656
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