Breakingviews-French banks' funding flames fuelled by Basel
(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
By Margaret Doyle and George Hay
LONDON, Sept 9 (Reuters Breakingviews) - BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA) may be disappointed if they reckon that their statements this month on funding will ease investor concerns. While shares in both French banks enjoyed a relief rally on Sept. 8, they are still down 40 and 54 percent respectively since early July. Both groups want to show that these sell-offs are fuelled by market hysteria, not fundamentals. But the Basel Committee’s tough new liquidity rules suggest the opposite.
BNP and SocGen’s statements did their best to soothe investor fears. The French banks did indeed issue a lot of debt before the latest funding crisis flared up; they have found substitutes for their U.S. money-market funders, albeit at higher cost; and they have issued debt more cheaply than their current elevated credit default swap levels might imply.
But while ballooning spreads in the banks’ credit default swaps seem excessive -- SocGen’s have risen by 159 percent since July 1 -- the Basel Committee’s new “Basel III” regulations provide a theoretical basis for investors’ jumpiness. The Committee’s new Liquidity Coverage Ratio (LCR), tests their ability to withstand a 30-day freeze in short-term funding markets by requiring banks’ available reserves to be at least 100 percent of their likely net cash outflows.
At the moment, SocGen and BNP are well and truly flunking the test, with LCRs of 65 and 70 percent respectively, according to JPMorgan. True, plenty of their euro zone peers aren’t faring much better. But to improve matters SocGen would need to issue 46 billion euros at longer, more expensive maturities, JPMorgan reckons. BNP would need 63 billion euros. That would smash returns if brought in now: BNP’s earnings per share in 2012 would fall 16 percent, while SocGen’s would fall by 38 percent.
Unsurprisingly, the banks are waging a rear-guard action against the LCR, and have already won some concessions. But they still bellyache that the LCR, which allots different weightings to assets and liabilities to represent their likely flakiness, elevates government bonds -- the source of the current crisis -- over alternatives like corporate bonds and equity. They also gripe that bank deposits should be given some weighting.
Regulators are reported to be sympathetic to these concerns. That could mean the deadline for compliance, currently set for 2015, is pushed back. Unless and until it is, investors will stay jittery about French banks.
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-- Societe Generale and BNP Paribas have issued statements in an attempt to reassure investors that their funding sources are secure. The French lenders were among the euro zone banks to have suffered most from the decision by U.S. money-market funds to limit their exposure to euro zone banks during August.
-- In a presentation to debt investors posted on its website on Sept. 1, SocGen said that it had issued 93 percent of its 2011 long-term funding programme. It said it had responded to the “August pullback” by the U.S. money-market funds by using euro-dollar swaps in the interbank market. The negative spread on the euro-dollar cross-currency basis swap, which expands when more investors want to borrow euros than dollars, has increased from minus 38 on July 25 to minus 101 on Sept. 9.
-- The bank also stressed that it issues debt below the level at which its CDS -- a measure of the riskiness of its debt
-- trade. SocGen’s CDS have more than tripled to more than 300 -- trade. SocGen’s CDS have more than tripled to more than 300 basis points since April.
-- BNP told investors that it had managed to secure dollar funds from alternative sources, but that this had “cost implications”. BNP said that its share price was “discounting unrealistically pessimistic scenarios.” Its CDS have almost tripled since April too.
-- SocGen shares are trading around 60 percent below their February high. BNP’s have lost more than 40 percent since their February high.
-- JPMorgan has estimated that French banks have huge funding shortfalls under the proposed “Basel III” Liquidity Coverage Ratio, which comes into force in 2015 after an observation period. Between them, the two have a gap of more than 100 billion euros, the analysts estimate.
-- Reuters story: BNP Paribas reassures on liquidity fears [ID:nLDE7860A5]
-- Societe Generale debt investor presentation: here
-- BNP Paribas Q&A for investors: here$FILE/Euro_Liquidity_Sovereign_debt.pdf
-- Federation Bancaire Francaise response to Basel proposals, April 20, 2011: here$File/FBF_comments_reforming_prudential_rules_EN.pdf
Time for action [ID:nL5E7JV0QQ]
Testing times [ID:nL5E7JQ0CI]
Dread October [ID:nL5E7JI0K1]
-- For previous columns by the author, Reuters customers can click on [DOYLE/]
(Editing by Pierre Briançon and David Evans)
(Created by Pierre Briançon)
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