Desperate banks turn to US repos
Outside a branch of French bank Societe Generale in Paris (Reuters/Charles Platiau)
US banks have become the unlikely saviours of their ailing European counterparts, signing private agreements to lend them billions of dollars in recent weeks after an exodus of nervous money market funds left many without ready access to short-term funding.
Agreements worth tens of billions of dollars have been signed in the past month alone, according to bankers directly involved, who added that senior management of firms on both sides of the transactions had been closely involved in hammering out deals.
French lenders are among those using such facilities, say bankers, although deals have also been struck with UK and other European firms. The loans have been made as repo agreements, with banks posting assets such as corporate loans and mortgage portfolios as collateral.
“We were able to use some of our assets to get long-term repos,” said one board member at a French bank. “It was a move we made to monetise some of the assets we had on the balance sheet which were good, quality assets, and also to mitigate the withdrawal of money market funds.”
Such deals, struck behind closed doors, show how European banks have been forced to look elsewhere for funding in recent weeks following the partial closure of many traditional sources such as US dollar money markets and unsecured bond issuance.
But the deals are coming at a high price, with US banks charging higher rates than normal – sometimes double the levels paid in money markets – as they seek to protect themselves. Assets posted are also subject to dramatic haircuts, meaning that European banks can only generate cash equivalent to part of their full value.
“Repo markets have always been a source of funding, but the question has always been about whether the price points work for both parties,” said one US banker involved in such deals. “As the [money market] investor base started to shy away from some names, the foreign banks became more interested in getting deals done.”
Paris-based Societe Generale said that it had struck US dollar repo deals equivalent to €6bn against a portfolio of commercial mortgage-backed securities and collateralised loans with maturities longer than six months. US bankers say other banks have struck similar deals in recent weeks to generate cash.
One source at BNP Paribas with knowledge of the situation said the bank was using US dollar repo markets for fixed-income activity, but “not more than usual”. Still, the Paris-based bank acknowledged that its use of short-term US money market funds had dropped by €10bn to €36bn since the end of July.
Repo facilities are the financial market equivalent of pawnshops. They are appealing because they mean that banks can generate cash from assets sitting on their balance sheets without having to sell them.
“Doing repo means you don’t have to sell and don’t have to take the loss on many of these assets upfront,” said another banker at a US bank, who has signed off on such deals in recent weeks. “You can do it privately, so nobody needs to know, and spread losses over the lifetime of the assets.”
The liquidity squeeze for European banks comes as risk aversion has prompted a flood of deposits into US banks in recent weeks. But firms have found scant use for that cash, prompting some – such as Bank of New York Mellon – to charge clients for making deposits. Others have deposited their excess cash at the Federal Reserve, with industry deposits at the central bank now US$1.62trn (see chart).
“You have extra liquidity [at US banks] because of what central banks have been doing and that’s coupled with a dearth of funding for [European] banks,” said the second US banker. “Bank deposits are at high levels and getting higher.”
Repo lending is seen as a sensible – and profitable – way to use that cash, with one banker saying that bosses had increased available funds for repo lending in recent weeks. Because the loans are backed by collateral, US banks are seen as well protected.
“US banks are not sure about what is going to happen, so they want to have liquid assets,” added the second US banker.
Many of the securities are also eligible for the Fed’s discount window operations, meaning that US banks can quickly turn them into cash in an emergency situation.
The fact that US banks are willing to increase their exposure to European firms – even if they insist on significant haircuts and conservative interest rates – demonstrates that they are happy to deal with such counterparties, at least for the moment.
The dollar funding squeeze may ease after the world’s biggest central banks came together on Thursday to set up emergency liquid dollar swaps for European and Japanese institutions, extending existing programmes from seven-day loans to three months. Banks had been reluctant to use the seven-day facilities for fear of stigma, but the move to extend was welcomed.
Still, many senior people say the central bank move will fail to stop banks shrinking their dependence on dollar funding.
“With scarcer money coming from US dollar money market funds, we need to diversify – which we have done – in terms of funding and to reduce certain activity,” added the French banker. “That’s what we are already implementing and in our view it’s something we can manage, we can absorb.”
Funding in euros is less of a problem, say senior officials at European firms, because banks can repo much of their balance sheet with the European Central Bank.
