Europe’s smaller banks face funding squeeze
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BANKING

Europe’s smaller banks face funding squeeze

Spar Nord CEO says regional institutions may find it difficult to raise money as BarCap reports wider difference in funding costs.

Europe’s smaller banks face a serious funding squeeze as investors turn towards less risky institutions and larger banks that are seen as too big to fail.

Spar Nord’s chief executive revealed in August how difficult it is for banks of its size to access international funding and he believes that it will remain this way for a while. Moody’s cut the rating of Denmark’s seventh-largest bank by assets at the beginning of the summer, along with five others.

Seasoned watchers of the Nordic banking scene are unlikely to have been surprised by the news from Spar Nord, given the severity of Denmark’s bank resolution scheme, which is generally regarded as the harshest in Europe.

There is nothing to suggest that Spar Nord is in danger. But a number of smaller Danish banks have already gone to the wall, and Standard & Poor’s warned at the end of July that another 15 were at risk of default.

Denmark’s regional banks face a range of funding pressures that are unusually severe even in these straitened times. Analysts have been warning for some time of a growing risk of polarization in the European banking industry between those with access to funding and those in danger of being shut out. A report published at the start of January 2010 by Barclays Capital, for example, ought to have sent a chill down the spines of the chief executives of regional banks throughout Europe.

The BarCap analysis noted that before the crisis the difference in the funding costs between the strongest and weakest banks in Europe was typically below 10 basis points. By the start of 2010, it had risen to close to 100bp. The likely consequence, BarCap cautioned, would be a widening chasm between the haves and the have-nots in European banking.

“Ironically,” the report says, “just as some of Europe’s biggest banks might be impacted by ‘too big to fail’ regulations, those same large, well-funded banks – HSBC, BNP Paribas, BBVA and the like – may well have the funding base that allows them to grow bigger at the expense of their weaker rivals.”

Although the report is now some 20 months old, one of its authors, Simon Samuels, says that its basic message is even more relevant today. “The issue is more serious now than it was in January 2010 because it has become increasingly apparent since then that what we are seeing in funding markets is not just a cyclical phenomenon,” he says. “People are now recognizing that this is a structural issue and that the funding dislocations we have seen since the summer of 2007 may be the new normal.”

Just a moment, though. Haven’t we been here before? Karim Mezani, head of syndicate at Natixis in Paris, believes we might have been. “I remember when the single European currency was being launched; people said we would be moving towards a world where the market would be closed to smaller bank borrowers unable to issue in benchmark size of €500 million or more,” he says. “Today, there is still a deep market for much smaller issues than that from Italian banks, for example. The reality is that domestic investors were able to adapt and were still prepared to support regional banks.”

Read the September issue of Euromoney for the in-depth feature Europe’s smaller banks face a long goodbye

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