Eurozone bank doubts worse for lack of deposits | ||
Eurozone bank doubts worse for lack of deposits Compiled by our staff writer
uropean banks like Societe Generale and Dexia are reeling from bad loans, but they are also suffering from a less obvious problem: their reliance on bond markets to fund operations. Unlike U.S. banks such as JPMorgan Chase & Co and Wells Fargo & Co, which fund a greater percentage of their loans using deposits, investor-owned banks in Europe generally depend more on borrowing in the short-term capital markets, said analyst David Henry. That leaves the European banks exposed to the vagaries of bond investors, who might suddenly demand much higher rates for their money or take it all back and put a bank at the mercy of a government for a bailout. Spikes in short-term rates for some European banks in recent weeks have raised fears of just that kind of meltdown. European bank shares tumbled as scared stock investors remembered 2008 when Bear Stearns and Lehman Brothers fell because of lack of ready funds to meet their obligations. The turmoil points to the need for vulnerable European banks to shrink their loan books to sizes more in line with what their deposits can support, or increase their deposit base. Analysts are also calling for more disclosure from the banks around their funding profiles. “European banking has to be rethought and recapitalized,” said one New York-based institutional investor in the money markets who declined to be named because of the risk of alienating clients. These banks find themselves in a corner. Since the 2008 financial crisis, many have been trying hard to raise more deposits, but it is proving to be tough. Deposits for investor-owned banks are more difficult to collect in Europe, where banks owned by local governments or by depositors have tax and cost advantages and a stranglehold on the market, said Michigan State University professor Rocco Huang. Competition for deposits has driven up costs, especially in Spain. Some banks are looking abroad. Dexia has branched into Turkey to get deposits, but one analyst said that might not be sustainable. The history of booming countries shows that such new money is unlikely to be as dependable as deposits in long-established accounts, said Morningstar bank analyst Erin Davis. At Paris-based Societe Generale, loans are 1.2 times as much as deposits, according to data compiled by Keefe, Bruyette & Woods. Dexia, the Franco-Belgian bank headquartered in Brussels, has 2.5 times as much money out on loan as it has in deposits. To make up the shortfalls, European banks rely on capital markets, including short-term money markets, which can be risky at times of uncertainty like now. “In the funding markets, people tend to shoot first and ask questions later,” said Mark Pawlak, a strategist and senior vice president at Keefe, Bruyette & Woods in New York. “There’s a certain amount of that going on now.” The downdrafts came as big U.S.-based money market funds quit rolling over billions of dollars of short-term loans to European banks. | ||
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