Financial institutions funding debate: Bank funding faces up to the credit crunch

NM, RBC Well, primarily people simply don’t know how long they are going to be operating in crisis mode. After last August, folks felt things might start to recover in the post-summer break; then there was renewed hope that the New Year would be the turning point; then it was the Bear Stearns bail-out. None of these has been a turning point, and the inter-bank finance and money markets are not functioning at levels remotely close to previous norms. So we’re adjusting to a completely new paradigm. There is liquidity but banks cannot fund in a way that creates the optimum liability structure and it is going to be this way for the foreseeable future.

HS, DnB NOR I agree with Nick, but I am breathing a little easier now. But to us it’s a very important distinction whether funds are available or not, and in some periods in November and around March funds were not available. That’s a very severe situation – will your customers draw on committed lines, which could create problems? Yes, you have the central banks guaranteeing back-up liquidity. But it’s not ideal depending on central banks, and you can be sure that they will not want to be seen to be funding loan growth.

CB, Westpac Internally, we’ve stopped trying to predict when it’s going to finish and we are now operating on the basis that the current conditions are with us for the medium term. It seems as though we’ve been through three separate periods of crisis: first, finding out who was holding sub-prime or related exposures at the outset; second, a period of fear of bank illiquidity; third, a period of recapitalization, which we are still in. And now overlaid on that we have macroeconomic fears. I think the most important thing from our point of view is that there is good liquidity in the market at a price. But that price is dramatically higher than it was, unfortunately.

FVG, Fortis I think the broader picture is that the banking industry has committed a serious breach of trust. Ten years ago it was bringing worthless dotcoms to market; today it is lending money to people who could not pay it back and being perceived to be at the root of serious economic problems. This will take a long time to fix. In my view, the real turning point will be when the banking industry comes back with ideas that capture the imagination and regain the trust of the investor audience.

In the meantime, the industry faces two threats: the first is the disappearance of the shadow banking system, which was procuring a lot of liquidity into the financial sector, and that is gone. And the second is that with credit spreads for financials wider than those for non-financials, the banks’ traditional intermediation role is extremely difficult.

RG, Shinsei Japanese banks experienced a severe version of the current scenario for the better part of a decade in the 1990s. Our predecessor bank, Long Term Credit Bank of Japan, was bailed out by the government of Japan in the late 1990s. So we have been through this cycle. It was a long and painful process. Now, looking at US and European banks, at least the pain is being taken much more quickly, so this should ultimately result in a healthier banking system much sooner.

Looking forward, there is a prospect for a prolonged period of low growth, as banks will no longer be intermediating financial flows to the same extent as previously. Banks will inevitably focus on repairing their balance sheets and tightening credit standards. What is happening with the Japanese banks is they are also looking to bolster their capital positions to some extent but clearly have not had to engage in balance sheet repair to the levels and urgency the US and European banks have had to embark upon.

The new market environment

Euromoney So what is the new market paradigm and how do you adapt to it?

LD, ANZ The first thing is that the new environment is much less predictable than the old and there’s not a lot of point trying to accurately predict when things are going to improve in some sort of attempt to ride it out. So volatility will remain high for the foreseeable future and you’ve got to adapt your strategies to account for it.

CB, Westpac Another way of putting it is that the market has become extremely cyclical: the crisis has been typified by six- to eight-week periods of better liquidity and better news, and then similar periods where things reverse, with each down cycle tending to be worse than the last.

RG, Shinsei The funding pendulum has certainly swung from being an issuers’ market a year ago to being an investors’ market today. I believe investors will continue to be in the driver’s seat through calendar 2008 and well into 2009. For issuers, this environment makes it much more difficult to find compelling entry points for new issuance as the cost of issuing at an inopportune time can be very expensive. Consequently, being opportunistic is a more risky strategy now. Issuers will have to increasingly take a hard look at the balance between selling assets and raising incremental new capital.