European Banks Face Large Funding Squeeze Due To Writedowns From Sovereign Debt Crisis

Bloomberg reports the obvious today, that European banks will be squeezed for funding - and profits - for years to come.

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"European banks at risk of writedowns from the sovereign debt crisis face a funding squeeze that may depress earnings, curb lending and imperil economic recovery in the region.
Investors are shunning bank securities on concern Greek, Portuguese and Spanish bonds held by the lenders will plunge in value. Bank bond sales slowed in May to the lowest since Lehman Brothers Holdings Inc.’s failure in 2008 as the extra yield buyers demand to hold the securities over government debt soared to the highest this year. Firms are wary of lending to each other, deposting record funds with the European Central Bank".

"The central bank is preventing a crisis by providing banks with unprecedented funding. In substituting long-term money with shorter-maturity ECB cash, policymakers are making it harder to wean banks off life support as well as the short-term financing that regulators blame for the credit crisis".

"Banks are still struggling to borrow even from one another and loans with a maturity of more than one month are “rare and expensive,” making them depend more on ECB funding, brice Vanamme, a London-based analyst at Deutsche Bank AG, wrote in a note to clients on June 9".

"Firms are leaving cash with the central bank instead of lending it to other banks amid concern that counterparties may collapse. Deposits have also climbed to a record as the ECB flooded money markets with cash since 2008".

“Increased reliance on short-term ECB loans and interbank funding runs counter to the rules being proposed by the Basel Committee on Banking Supervision. The committee, which sets minimum standards for banks in 27 countries, plans to require banks to maintain a “net stable funding ratio” of 100 percent, meaning they would need an amount of longer-term loans or deposits equal to their financing needs for 12 months".