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| The Banco Popolare in Milan. The cost of insuring the bank’s 5-year senior bonds has more than doubled from the start of the year |
The Markit iTraxx senior financials index, covering 25 European banks and insurers, widened 15 basis points (bps), which Markit said was its widest ever level.
European bank shares held steadier, however, unlike many recent trading days when shares have slumped when insurance costs widened. By 1530 GMT, the DJ Stoxx European bank index was flat at 134 points, just above its two-year low of 132.8 from Friday.
A sharp deterioration in short-term dollar funding for European banks has raised fears of liquidity problems if it lasts through September, and prompted lenders to turn to the European Central Bank (ECB) for cash.
Analysts said central bank support should prevent the type of liquidity crisis that saw the collapse of Lehman Brothers, and most worries were about the impact higher funding costs will have on profits.
The ECB’s offering of dollar liquidity today will be closely watched, analysts said.
The cost of insuring Italy’s Banco Popolare 5-year senior bonds jumped to $655,000 (6.55%) for every $10mn of debt held, up 46 bps yesterday and more than double the cost at the start of the year.
The credit default swap (CDS) for Unicredit widened by 27 bps to 392 and for Intesa Sanpaolo it widened by 13 bps to 340, according to Markit data.
Also nudging wider were Societe Generale, Bankinter and Royal Bank of Scotland.
Funding strains have increased after US money market funds, a $2.5tn industry providing key short-term liquidity, have retreated from European banks.
MMFs cut their exposure to European banks by 9% during July and by 20% in June and July, according to a report by Fitch, which also showed the funds had shortened the funding they provide.
Higher bank funding costs, especially in the medium-term, are a big risk to bank profits and are also a threat to economic recovery, analysts at Morgan Stanley have said.
They estimated Europe’s leading banks have issued about 90% of their term funding needs for this year on average, but they have struggled to raise long-term funding in the last three months, and even when markets re-open the costs are likely to be high.
US Federal Reserve data on Friday showed overseas banks held $813bn in cash on August 10, up $55bn from a week earlier after a $132bn decline in the previous two weeks, surprising some analysts who had expected another fall.