Even before they tackle this, the Institute of International Finance, the trade body for large international banks, suggests that banks globally already have to refinance $7.6 trillion of maturing bonds between now and 2015.
Now, as central banks and governments struggle to roll over their own finances, their capacity to fund the global banking system, including through purchase and repo financing of assets banks can no longer securitize and sell on to private buyers, is diminished. Funding costs are going up. Volumes of finance available are unknown.
For now, worries centre on troubled sovereigns in developed Europe and by extension on banks there.
European bank analysts at Credit Suisse have been monitoring the new-issue market for term debt and find that banks are paying a hefty price to sell liabilities while struggling to issue at sufficient pace to term out.
Banks started the year at a cracking pace, issuing €118 billion of non-government-guaranteed debt in January alone through both covered bonds and unsecured bonds. That would imply a likely issuance volume for 2010 of €1.4 trillion, roughly double the amount seen in 2009. If that pace persists for three years, banks will issue €4.2 trillion gross. But that is only just ahead of what they must issue to roll over maturities falling due of €3.1 trillion in the eurozone and £650 billion for UK banks. It is not enough to make substantial steps to further term out liabilities.
Credit Suisse even questions whether the bond markets can continue to support this level of bank issuance, never mind allow them to accelerate it.
And the costs are substantial – 75 basis points over swaps in aggregate, suggests Credit Suisse, after grappling with a diffuse mix of covered and unsecured and state-owned and private bank issuers of different types. Banks whose stock Credit Suisse covers had issued €22.2 billion of covered bonds in the three months to February 2010 at a weighted average spread of 43bp and €12.2 billion of unsecured bonds at a rather alarming weighted average spread of 106bp.
These costs are going to be passed on to borrowers and to damage net interest margin and so returns to providers of equity capital to banks.
Is there anything regulators and governments can do, hampered as they are by the difficulties of rolling over their own huge borrowing needs?
The obvious suggestion is to focus their efforts on removing regulatory uncertainty over the securitization market in the hope of winning back conventional buyers to replace the destroyed SIVs
This should be a priority in any case. By the time the financial industry crisis hit in 2007, the IIF calculates that securitized loans provided 41% of the total outstanding $24 trillion of US credit. That is higher than loans on banks’ books, accounting for 35%, or conventional bonds, accounting for 24%.
Unfortunately, many US money managers acting for real-money investors in securitizations are nursing strong grievances over how they have fared in previous government interventions. Several tell Euromoney that they are bitter at how the US government and banks have proceeded to modify troubled home loans, so reducing the principal due to bondholders of securitizations of supposedly senior secured collateral. This has been done while conveniently ignoring more junior second-lien loans, still mainly held by the banks themselves.
Meanwhile in Europe, solvency II regulations requiring insurance companies to hold higher capital against risky assets including securitizations will hardly bolster demand.
Of course if a second-dip recession further curtails already weak demand for new credit, reviving the securitization market might look redundant.
Let’s hope it doesn’t come to that.
