Global banking regulators envisage a low-risk world where banks fund themselves through long-term deposits and bond issuance. However, the reality on the ground in a Europe ravaged by a sovereign-debt crisis could not be more different. With both euro and dollar term markets closed for the foreseeable future and US money market managers turning their backs on the sector, European banks are becoming ever more reliant on the shortest-dated funding sources and central bank liquidity programmes.
There is little sign that conditions are likely to change. With markets still waiting for further details from December’s European Council summit, and banks on both sides of the Atlantic suspecting each other of hiding more toxic sovereign assets than previously thought, the availability of market-based funding in general, and dollars in particular, is extremely limited.
“The root of the problem at the moment is sovereign risk,” says a European banking analyst...
