23/1/2014: Funding Markets Spring Hits a Bump in the Euro Area: H2 2013 Repo Market Report

ICMA (International Capital Markets Association) report released yesterday showed massive 9.5% contraction in euro area repo markets, leading to lower availability of short-term funding to banks in the market over H2 2013 compared to H1. The core drivers of the decline are

• ECB's supply of funds met by lenders who are becoming more reliant on Central Bank's funding, and
• Cash hoarding by banks.

Here is a summary table showing H2 2013 repo market at the lowest point of any half-year period since H1 2009 and the third lowest reading since H1 2005.

At the same time, the share of anonymous electronic trading jumped unexpectedly to 25% from 19.8% a year ago. This came at the expense of domestic business (down to 26.1% from 29.7% a year ago) and less significantly at the expense of cross-border transactions within the euro area (down to 18% from 18.9% a year ago). The survey suggested that ECB's funding sources are the driver behind these trends in relation to domestic repos.

Summary table:

Net conclusion: things are not running smoothly in the funding markets, some five years since the crisis trough.

Full report here: http://www.icmagroup.org/media/Press-releases/

22/4/2013: Who funds growth in Europe?..

There are charts and then there are Charts. One example of the latter is via IMF CR1371

The above shows a number of really interesting differences between the euro area and the US, as well as within euro area:

• Look at the share of overall funding accruing to the traditional (deposits) banks in the US (tiny) and the euro area (massive) - debt is the preferred form of funding for Europe
• Look at the share of equity in the US funding and in euro area, ex-Luxembourg - equity is not a preferred way for funding growth in Europe.
• Why the above matter? Simply put, debt - especially banks debt - is not challenging existent ownership of the firm raising funding. Which means that patriarchal structures of family-owned firms, with their inefficient and paternalistic hiring and promotions and management systems can be sustained more easily in the case of debt-funded firms than in the case of equity funded ones.
• Look at the role played in the US by the credit supplied by 'other financial institutions' - non-banks. Again, these would be more 'activist'-styled funding streams exerting more pressure on management and ownership structures.

What about Ireland? Look at the composition of funding sources in the country:

1. Strong reliance on corporate bonds markets is probably reflective of three factors: (a) concentrated loans issued during the building boom and related to construction, development & investment in land remain the legacy of the boom and rely on collateralized bonds issuance, (b) banks funding via collateralization, (c) concentrated nature of Irish listed plcs, (d) massive M&A spree undertaken by Irish plcs and larger private companies on foot of cheap leverage available in the 2000-2007 period, etc. The volume of bonds might be large, but their quality is most likely lower due to the above points.
2. Strong - actually second strongest in the sample after Cyprus - reliance on bank lending to fund economy.
3. Weak, extremely thin equity cushion. 

Now, keep in mind: equity is the best, most stable and most suitable for absorbing crisis impact form of funding.