BANK CHIEFS ARE in denial. So are many of the bankers whom they employ, who earn their living advising other financial institutions on how to fund themselves.
Throughout the summer, all the way through to late September, the public markets for bank debt were firmly shut. There were, literally, no deals.
Bankers attribute this to a combination of factors. The huge uncertainty surrounding the eurozone was the main one. That had forced spreads out so wide that most banks were not prepared to pay them.
As the funding freeze spread, bank treasurers tried to convince Euromoney that their institutions wouldn’t be too badly affected. They had pre-funded their 2011 needs in the first half of the year when the markets were much more receptive. They remained active in secured markets and in private placements.
The euphoric welcome to a handful of short-dated FRNs and longer-term bond deals by national champions reopening the new-issue market in October suggested that those bankers’ sang-froid was only for public show.
From the endless meetings across Europe throughout last month, it became clear that Europe’s banks would need to raise at least another €100 billion in capital. The market will need to be open to more than a select few if the private sector is to pick up the shortfall, which it almost certainly will not.
Amid all this confusion, it might be that something even more profound is going on that bank executives, while busy urging politicians to come up with a truly convincing plan for sovereign finances that will shore up their banks’ own assets, are contriving to ignore.
The bank funding markets face a crisis that goes far beyond the problems of Greek haircuts. Banks don’t just need to adapt to new capital levels, they need to get used to much higher costs of that capital – if it’s even available.
Both debt and equity investors, by refusing to fund banks and by selling banks’ shares down to such discounts, are going to force, perhaps quite quickly now, a substantial structural change in the banking industry of a scale that regulators have timidly hinted at phasing in over many years.
Bankers now talk of deleveraging and balance-sheet shrinkage. But what is about to unfold is more akin to a new Glass-Steagall: an investor-forced break-up of large, complex, universal banks into much smaller and more specialized institutions.
Bankers are worse than politicians
"The only people even more guilty of not getting it than the politicians are the bankers," says an adviser to the senior executives at a select number of large European financial institutions. "Bankers always complain about European politicians always being behind the curve and only ever coming up with the barest minimum plan to stave off the latest phase of crisis...but the bankers themselves are even worse."
This adviser has been frustrated by his clients’ unwillingness to see larger investor concerns about the banking industry that extend beyond the immediate worry over exposure to toxic sovereign debt. He says: "Debt investors have identified business models that are unsustainable and decided to stop funding them. Equity investors, similarly, are correctly pricing in forced dilution that could come in the next few weeks as European banks that are poorly managed and following the wrong business models are forcibly recapitalized."
This is where his frustration comes in. He reels off a string of suggestions he has made to bank clients to exit business and raise capital that they have rejected in the past few months in the name of retaining their long-term strategy to run diverse business models that supposedly sustain banks by maintaining a capacity to derive earnings from different sources.
One rejected a suggestion to enter negotiations to sell off its asset management division, another to dispose of a banking subsidiary in a volatile emerging market that the client bank decided it should retain because it might be a big source of profits in five or 10 years’ time.
Luxury of time
Banks, he suggests, don’t have the luxury of time and would be well advised to raise capital as best they can rather than have governments forcibly inject it on punitive terms.
"Bankers complain that shareholders are unfairly undervaluing their shares at 0.6 times book or 0.4 times book just because of fear over sovereign risk. But when you really drill down through individual businesses, inside many of these banks there are clear signs of creeping devaluation. Businesses that the banks seem to think should be worth €4 billion are in fact probably worth only half that or less if recession takes hold. Shareholders are right."
His thesis is that debt capital markets bankers, who walk the line between bank treasuries seeking to raise funds and debt investors now pricing many of them out of the market, are picking up a sense of this.
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"It may be that the banking industry changes back to the structure that prevailed in the 1980s. We may go back to a much more mixed banking system"
David Lyon, Barclays Capital |
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Asked if the few bank deals in October mark a broad-based reopening of the senior unsecured bank funding market, most FIG DCM bankers reluctantly admit they probably do not. David Lyon, managing director, financial institution capital markets at Barclays Capital, says: "We are living through a period of momentous change. It may take some time yet for investors to assess the risk on unsecured bank debt and what they require in return for it. Meanwhile we are in a huge deleveraging process."
And where will that end? "It may be that the banking industry changes back to something more akin to the structure that prevailed in the 1980s when there were a number of national champions and many more smaller, specialized lenders, some of which were asset financers. We may go back to a much more mixed banking system."
