Monday, March 12, 2012

European Banking and Capital Requirements (BIS)

European bank funding and deleveraging

Asset prices broadly recovered some of their previous losses between early December and the end of February, as the severity of the euro area sovereign and banking crises eased somewhat. Equity prices rose by almost 10% on average in developed countries and by a little more in emerging markets. Bank equity prices increased particularly sharply. Gains in credit markets reflected the same pattern. Central to these developments was an easing of fears that funding strains and other pressures on European banks to deleverage could lead to forced asset sales, contractions in credit and weaker economic activity.  This article focuses on developments in European bank funding conditions and deleveraging, documenting their impact to date on financial markets and the global economy.

Funding conditions at European banks improved following special policy measures introduced by central banks around the beginning of December.  Before that time, many banks had been unable to raise unsecured funds in bond markets and the cost of short-term funding had risen to levels only previously exceeded during the 2008 banking crisis. Dollar funding had become especially expensive. The ECB then announced that it would lend euros to banks for three years against a wider set of collateral. Furthermore, the cost of swapping euros into dollars fell around the same time, as central banks reduced the price of their international swap lines. Short-term borrowing costs then declined and unsecured bond issuance revived.

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