EU finance chiefs bid to end bank funding deadlock

EUROPE’S finance chiefs will try again next week to end a deadlock over bank funding, after the industry regulator warned time is running out to revive confidence across the eurozone.

On Wednesday, EU finance ministers will seek agreement over state-backed guarantees in a bid to unblock wholesale funding markets. With €700 billion of bank debt needing to roll over next year, the need is pressing.

One solution touted, a pooling of state-backed guarantees, has effectively been abandoned, while another — individual national guarantees, is seen as unlikely to help banks in eurozone countries whose government bonds are being given a wide berth.

The European Central Bank (ECB) may end up having to step in with a band-aid solution of two-to-three year liquidity lines to banks.

The European Banking Authority (EBA) has drafted a three-pronged package to shore up confidence in banks: a €106bn recapitalisation by mid-2012, writedowns on exposures to stressed sovereign debt and the funding guarantees.

But EBA chairman Andrea Enria signalled this week his increasing frustration with the deadlocked political process, including how to leverage the EU’s new bailout fund, the European Financial Stability Facility (EFSF).

“The fact that so far only the EBA’s measures to strengthen bank capital have been publicly put forward is for us a source of real concern,” Mr Enria said. “We believe that further delays to having all the elements in place are severely affecting the effectiveness of the whole package.”

Some €1.7 trillion of bank funding is due to roll over in the next three years, analysts at Morgan Stanley estimate. That includes €650-€700bn next year, most of it in the first half, Enria said.

But the EBA package is already in danger of being left behind by the deepening eurozone crisis, making it harder for banks to find enough quality collateral to back loans and which is often in the form of government bonds.

“With the sovereign debt crisis moving to the bigger eurozone countries, there is no longer any confidence in collateral, and the only way to get banks lending to each other again is to restore trust and confidence in sovereign debt used for collateral,” said Godfried de Vidts, director of European Affairs at brokerage ICAP.

So far the EBA is sticking with its timetable to publish by the end of November how much capital each bank must raise, but it and bankers now worry more about funding than capital.

“We are in a bad spot,” Stefano Marsaglia, chairman of Barclays Capital’s financial institutions group, said at a Bank Capital conference on Thursday. “The problem for banks is very much a funding problem, it’s not so much a capital problem.”

The EBA has told banks they need to raise about €106bn to repair their balance sheets, but that amount could rise as the watchdog may take a tougher line on what qualifies as capital and losses on sovereign bonds.

Banks in Germany, for example, may need €10bn, double the original estimate; and Commerzbank may need about €5bn in capital, sources told Reuters.