October 24, 2011 6:33 pm

French financials lead increase in borrowing from the ECB

French banks have increased their borrowing from the European Central Bank by more than their Italian and Spanish peers in recent months, underlining how stress in the region’s financial system has migrated to “stronger” countries of the eurozone.

France’s lenders raised borrowing from the ECB by €67bn between the end of June and October 11, taking their total usage to €86.7bn, an analysis of French central bank data from JPMorgan shows. That is more than the €30bn increase for Spanish banks and the €63bn increase for Italian banks between the end of June and end of September, the latest available data.

“We argued in the past that [the rise in ECB borrowing] was mainly driven by Italian and Spanish banks,” JPM analysts wrote in a note to clients, adding that the “French were also behind the sharp increase in the reliance of European banks on the ECB”.

Dexia, the Franco-Belgian bank, is believed by JPM to be responsible for €18bn of the €67bn rise, which includes borrowing from the ECB’s main and longer-term refinancing operations.

In its last set of results, Dexia said it had €20bn worth of available collateral it could use as security to tap funds at the ECB. That was not enough to save the bank, which this month agreed to be bailed out a second time.

Excluding Dexia leaves almost €50bn of the increase in ECB usage coming from other French banks.

France’s lenders have been in the spotlight in recent weeks as investors fret over their access to dollar funding. The largest US money market funds trimmed short-term lending to French financials by 42 per cent between the end of September and the end of August, Fitch Ratings data showed last week.

On Monday, the US dollar Libor-OIS spread, a gauge of fear in the banking sector, reached a two-year high – indicating that banks may be struggling to obtain funding in the US currency.

French banks have lost €164bn worth of short-term funding from the US, JPM estimates show, meaning increased ECB funding has replaced just 40 per cent.

Separately, the ECB said on Monday it had spent €4.49bn on eurozone government bonds last week, the highest amount since mid-September, taking the bond-buying purchase programme’s total to €169.5bn.

France’s banks have threatened to shrink their balance sheets to deal with the squeeze in funding, with both BNP Paribas and Société Générale signalling plans to offload billions of euros worth of assets. The banks may also cut back on lending, raising the prospect of a French credit crunch just when Europe is arguably in need of a lending boost.

“People think that currently the stress is only in US money market funding and nowhere else,” said Omar Fall, French banks analyst at UBS. “But the stresses are broader.”

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