The funding hole for European banks is deepening following a sharp fall in bond issuance this year as market turmoil leads to a region-wide credit crunch.
European banks have sold $413bn worth of bonds this year, equivalent to just two-thirds of the $654bn that is due to be returned to investors in 2011 as the debts mature, according to data compiled for the Financial Times by Dealogic.
That leaves the banks with a $241bn funding gap in 2011, the first time European lenders have collectively been unable to replace their maturing debt with new bonds for at least the past five years.
Investors say they have been deterred from buying bank bonds because of uncertainty over the financial health of some banks, the fate of the eurozone and the impact of new financial regulation. The funding freeze has raised fears about the knock-on effects for companies reliant on bank funding and the broader economy.
“Some deleveraging after the financial crisis is clearly needed, but I think banks are being sent on a crash diet that will have wider implications,” said Morgan Stanley analyst Huw van Steenis. “It’s not just the risk of a European credit crunch, it will have a knock-on effect in Asia and the US.”
Morgan Stanley estimates that banks will have to dispose of as much as $3,300bn worth of assets over the next few years to meet new regulations on the amount of capital buffers they hold and to address the funding shortfall. The banks’ funding difficulties and shrinking balance sheets are being monitored with mounting concern by the European Central Bank, which is considering a number of new supportive measures. It is worried about the implications for financial stability and the risk of a lending squeeze driving the eurozone deeper into recession.
Banks face an even greater redemption hump next year, when $720bn worth of debt is due to mature.
The Dealogic bank data includes so-called senior unsecured issuance, traditionally the bread and butter of bank funding. It excludes covered bonds, the bundled packages of loans and mortgages that have become increasingly popular for banks to issue.
Including such debt, European banks sold $744bn worth of bonds this year, compared with $888bn worth of maturing debt, still leaving a $144bn shortfall.
With additional reporting by Robin Wigglesworth in London and Ralph Atkins in Frankfurt