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Opinion

Banks struggle to meet funding challenge

The banking industry’s key challenge remains to stabilize its own sources of finance. Regulators and creditors have pressed banks to build their deposit gathering and extend the term of their market borrowings, with some policymakers calling for levies on non-deposit borrowings.

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.

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