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2018 | OriginalPaper | Buchkapitel

1. The Funding Strategies of European Banks: A Discussion

verfasst von : Fabrizio Crespi, Danilo V. Mascia

Erschienen in: Bank Funding Strategies

Verlag: Springer International Publishing

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Abstract

The financial turmoil occurred during the last decade has heavily affected the stability of the financial systems and the European economy. Indeed, the implications generated by the crises on the real economy, along with the important regulatory changes affecting banks, have surely had an impact on the behaviour of European banks in regards to their approach towards funding. The analysis of aggregated data for the last ten years confirms the widespread view in the literature that, at least for the largest European economies, retail deposits have acquired an increasing importance in terms of main funding instrument available to the credit institutions. Indeed, banks have progressively replaced wholesale funding in favour of deposits. Moreover, our analysis highlights a decline in the volume of bonds issued by the financial institutions over the last few years.

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Nächstes Kapitel The Funding Strategies of Italian Banks: The Importance of Bonds

Le Leslé (2012) reports: “Funding and liquidity management are interrelated. Virtually every transaction has implications for a bank’s funding needs and, more immediately, for its liquidity management. A bank’s funding strategy will condition liquidity management needs. Hence, the risks embedded in the chosen funding strategy will translate into risks that liquidity management will have to address. Failure to properly manage funding risk may suddenly manifest itself as a liquidity problem, should those sources withdraw funding at short notice. Conversely, inadequate liquidity risk management may place unmanageable strains on a bank’s funding strategy by requiring very large amounts of funding to be raised at short notice.”

Funding strategies, or funding models/structures, are other terms often used to describe the way in which banks raise debt. Even if this book is mainly focused on a particular form of debt instrument (i.e. bonds), we use the above terms as a synonym of liability management. Capital management is the term specifically used to describe strategic decisions about the amount and composition of capital in the form of equity instruments.

For example, the funding strategies of commercial banks and investment banks diverge substantially. Another factor that influences the funding strategies of banks is the structure of the financial system in which they operate: bank-oriented models, in which bank loans represent the main financial source for enterprises, and market-led models, where corporates primarily raise funds in capital markets, represent different environments for the banks’ funding choices. Similarly, the size of a bank and the level of internationalization of its business produce effects on the funding strategies adopted.

See Van Rixtel and Gasperini (2013), Van Ritxtel et al. (2015).

As we will see in Chap. 2, this is the typical situation for small banks in Italy, which usually place their bonds to retail depositors.

Before the financial crisis, short-term wholesale funding was mainly unsecured. Since 2007, the share of collateralized funding in overall wholesale bank funding has increased considerably (Agur 2013).

Technical forms of retail deposits can vary substantially; apart from the difference between short-term and long-term maturities, other contractual conditions can influence the liquidity and risk of deposits. As we will see in Chap. 3, this is true especially for bonds, in which the range of different structures and embedded options is very large.

During the last few decades, financial markets and banks became strongly interconnected. Banks improved their risk-hedging abilities through financial markets and opened new avenues of funding, such as the “originate-to-distribute” securitisation model. Moreover, the rapid growth of investment banking activity, both by pure investment banks and universal banks, led to a growing reliance on wholesale funding, especially at short maturities (Van Rixtel and Gasperini 2013).

Frank and Goya (2009), for instance, investigate the relative importance of 38 factors in the leverage decisions of publicly traded US firms.

This first reasoning is present in Mishkin (2000).

See Berger et al. (2008).

The authors also find that, in the observed period (1991–2004), banks have entirely financed their balance sheet growth via non-deposit liabilities, which implies that the composition of banks’ total liabilities has shifted away from deposits. But this evidence is valid in the pre-crisis setting: as we will explain later, after 2008 the bank funding strategies have dramatically changed.

Basel III was introduced in the EU by the so-called CRD IV package.

The capital measure is the Tier 1 capital of the risk-based capital framework as defined in paragraphs 49–96 of the Basel III framework. The exposure measure for the leverage ratio should generally follow the accounting value, subject to the following: (i) on-balance sheet, non-derivative exposures are included in the exposure measure net of specific provisions or accounting valuation adjustments; (ii) netting of loans and deposits is not allowed. See Basel Committee on Banking Supervision (2014a), Basel III leverage ratio framework and disclosure requirements, for a deeper description.

See Basel Committee on Banking Supervision (2014b), Liquidity coverage ratio disclosure standards, for more details about HLAs.

Another related aspect concerns the fact that long-term unsecured bonds issued by banks are not considered HLA. This means that a bank could find more difficult to place its bonds if other banks do not want to buy them in order to comply with the LCR rules.

For more details, see Basel Committee on Banking Supervision (2014c), Basel III: the net stable funding ratio.

At the moment, the MREL requirements and the TLCA requirements are similar but non exactly the same. The BRRD2 will probably introduce a MREL requirement for G-SIB in line with the TLCA rule, so to avoid a duplication of rules for the same bank.

Confidence in banks had eroded, risk aversion had increased, and investors such as money market and mutual funds had to deal with their own liquidity difficulties (redemptions). It was then very challenging for banks to issue bonds in a dried market; moreover, unsecured bonds and covered bonds had to compete with government guaranteed instruments. ECB was worried that government-guaranteed funding could crowd out bank debt for a long time.

ECB extended consequently the range of eligible assets.

Another immediate consequence of the financial crisis was the dramatic increase in funding costs, especially for bonds. Subsequently, the extraordinary measures of monetary policies, yet in place nowadays, drastically changed the interest rate environment, and the cost of funding for banks basically went down to zero.

Banks’ balance sheet expanded significantly from 2003 to 2007 (+53%) due to the availability of ample liquidity.

The ECB also signalled an increased imbalance between the longer term lending to costumers and the short-term funding.

The same indication is reported by the ECB itself in an article dedicated to the composition and cost of bank funding edited in Economic Bulletin (see ECB 2016).

Moreover, the report by ECB (2012) indicated a strong increase in the secured money market transactions.

Funding through debt securities is traditionally negligible in the banking sectors of a few small Euro area countries, whereas it has represented almost a quarter of the funding structure (all liabilities) in a number of larger countries over the last decade.

For example, small European banks usually resort to wholesale funding much less than do large European banks.

The ECB distinguishes between “vulnerable countries” (countries more directly affected by the crisis, namely Ireland, Greece, Spain, Italy, Cyprus, Portugal and Slovenia), and “less vulnerable countries” (the remaining Euro area countries).

Similarly, the composition of deposits from MFIs changed as more volatile interbank liquidity was partially replaced by central bank liquidity. This trend was particularly significant in vulnerable countries.

Note that decentralization is different from diversification of funding.

For example, in less developed markets, banks often fund local credit with cross-border intragroup transfers.

But conversely, lower rated banks are more likely to issue secured debt.

For example, sovereign CDS spreads were negatively correlated with bond issuance during the crisis period, suggesting the importance of country-specific risk factors.

The aggregated balance sheet data for Euro area credit institutions are available at the following link: http://sdw.ecb.europa.eu/browse.do?node=9691313.

The Directive is available at the following link: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32006L0048.

As of August 2017, the countries in the European monetary Union are the following: Austria, Belgium, Cyprus, Germany, Estonia, Spain, Finland, France, Greece, Ireland, Italy, Lithuania, Luxembourg, Latvia, Malta, Netherlands, Portugal, Slovenia, Slovakia.

Note that, because the data on the ‘Debt Securities Issued’—which is the main variable of interest in this chapter—was not available for Latvia, The Netherlands, and Malta, we had to exclude these three countries from our analysis.

The regulation is available at the following link: https://publications.europa.eu/en/publication-detail/-/publication/accb1c9c-6cae-4b36-99ca-040e2a7566ed/language-en.

Agur, I., 2013. Wholesale bank funding, capital requirements and credit rationing. Journal of Financial Stability 9, 38–45.

Basel Committee on Banking Supervision, 2014a. Basel III leverage ratio framework and disclosure requirements. Bank for International Settlements. Basel (Switzerland).

Basel Committee on Banking Supervision, 2014b. Liquidity coverage ratio disclosure. Bank for International Settlements. Basel (Switzerland).

Basel Committee on Banking Supervision, 2014c. Basel III: The net stable funding ratio. Bank for International Settlements. Basel (Switzerland).

Berger, A., DeYoung, R., Flannery, M., Lee, D. Öztekin, Ö., 2008. How do large banking organizations manage their capital ratios? Journal of Financial Services Research 34, 123–149.

CGFS, 2010. Funding patterns and liquidity management of internationally active banks. Committee on the Global Financial System Papers No. 39.

ECB, 2009. EU Banks’ funding structures and policies. European Central Bank, Frankfurt (Germany).

ECB, 2012. Changes in bank financing patterns. European Central Bank, Frankfurt (Germany).

ECB, 2016. Recent developments in the composition and cost of bank funding in the euro area. Economic Bulletin 1, 26–45.

Evanoff, D.D., Jagtiani, J.A., Nakata, T., 2011. Enhancing market discipline in banking: The role of subordinated debt in financial regulatory reform. Journal of Economics and Business 63(1), 1–22.

Flannery, M., 1994. Debt maturity and the deadweight cost of leverage: Optimally financing banking firms. American Economic Review 84(1), 320–331.

Frank, M.Z., Goyal, V.K., 2009. Capital structure decisions: Which factors are reliably important? Financial management 38(1), 1–37.

Gambacorta, L., van Rixtel, A., Schiaffi, S., 2017. Changing business models in international bank funding. BIS Working Papers No. 614.

Gropp, R., Heider, F., 2009. The determinants of bank capital structure. European Central Bank Working Paper Series No. 1096.

Le Leslé, V., 2012. Bank debt in Europe: “Are funding models broken?”. IMF Working Paper No. 12/299.

Mendicino, C., Nokolov, K., Suarez, J., 2017. Equity versus bail-in debt in banking: Am agency perspective. ESRB Working Paper Series No. 50.

Mishkin, F., 2000. The economics of money, banking and financial markets. Pearson education.

Van Rixtel, A., Gasperini, G., 2013. Financial crises and bank funding: Recent experience in the euro area. BIS Working Papers No. 406.

Van Rixtel, A., Gonzalez, L.R., Yang, J., 2015. The determinants of long-term debt issuance by European banks: Evidence of two crises. BIS Working Papers No. 513.

Titel: The Funding Strategies of European Banks: A Discussion
verfasst von: Fabrizio Crespi
Danilo V. Mascia
Verlag: Springer International Publishing
Buch: Bank Funding Strategies
Print ISBN: 978-3-319-69412-2

Electronic ISBN: 978-3-319-69413-9

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-69413-9_1