Page 40 - 2014_3865_EBA 5th

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5. Liabilities side
Market funding conditions continued the
improving trend observed since the second
part of 2012 and all banks regained access
to market funding. The cost of funding de-
creased and banks, especially from finan-
cially stressed countries, benefited from the
strong investor demand for European banks’
debt. European banks have started to adapt
their funding and capital structure to the new
regulatory requirements and issuance of
contingent convertible instruments signifi-
cantly picked up in early 2014. Deposit growth
has decelerated during the last months but
deposits are forming an increasing part of
banks’ funding as deleveraging continues.
Market funding continued steadily to replace
early repayments of the two 3 year refinanc-
ing operations (long-term refinancing op-
erations (LTRO)) provided by the ECB, thus
decreasing reliance on official sources of
funding. By March 2014, almost half of the
funding provided in the two LTROs had been
repaid. The pace of repayments has deceler-
ated from early 2013 resulting in some con-
cerns about possible divergence between
stronger and weaker institutions. Target 2
imbalances continued decreasing and many
banks domiciled in financially stressed sov-
ereigns strengthened their customer de-
posit bases. Almost all market analysts who
responded to the questionnaire believed
funding conditions would remain benign or
continue to improve in 2014. This was seen
mostly stemming from higher demand for
bank debt outside the EU and positive im-
pacts from regulatory and policy steps. The
majority of market analysts indicated that
banks would be able to fund themselves on
the market and would not need to use addi-
tional long-term funding support measures.
Decisive policy measures and central banks’
engagement in unconventional policies to
support macroeconomic stability and bank
funding have improved market sentiment, re-
duced the perceived equity risk premium and
helped ease funding pressures. However,
despite improvements also in fundamentals,
some banks still face continued structural
funding challenges, in particular in countries
having experienced some sovereign stress.
Despite benign funding conditions, financial
markets remain in an overall fragile state
and banks should continue repairing their
balance sheets to be able to withstand ad-
verse changes in funding conditions.
5.1 Funding
During the first six months of 2014 the pricing
of both short-term and long-term funding has
continued to improve and all banks now have
regained access to market funding. Investors
have been intensively looking for yield in the
low interest rate environment resulting in high
demand, especially for bonds issued by banks
domiciled in financially stressed sovereigns.
Spreads of some of these banks have reached
pre-crisis levels after decreasing sovereign
yields reaching 8 year lows. In late 2013 and
also in 2014, smaller banks domiciled in fi-
nancially stressed countries have returned to
the unsecured funding markets.
Market funding conditions, including
unsecured funding, have continued to
The issuance activity has been relatively high
in early 2014 but substantial net negative is-
suance is expected by European banks for
2014. This is due to decreasing funding needs
mainly resulting from continued deleverag-
ing and strong deposit bases.
Funding activity in 2014 has been more fo-
cused on unsecured funding and volumes
of issued covered bonds were lower than in
2012 and 2013. The refinancing rate of unse-
cured funding was elevated in the first quar-
ter of 2014 following a similar pattern to that
in early 2013. Based on the RAQ responses,
banks expect unsecured funding to increase
and form a significant part of their funding
structure (Figure 35).