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US money market funds have retreated from eurozone bank debt, but financial institutions in the single currency have carried on funding regardless. With an already limited pool of borrowers, the funds may find they miss eurozone commercial paper more than the banks miss their dollars.
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The RMBS asset class is proving more effective at tapping US investor demand than European covered bonds. One reason is the gulf in collateral transparency. The latest ECBC initiative will not be enough to solve this.
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Europe’s leaders can restore confidence in the banking sector by offering to backstop the worst of feared losses. Across the board injections of equity capital would be the wrong way to do that. More creative solutions are needed.
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A rumoured second round of ECB bond purchasing has breathed life into what had been a dormant covered bond market — but don’t get too excited. Curiously, even with this week’s supply, September issuance is going to fall short of September 2008 when Lehman collapsed. That should tell you something.
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Rumours of the ECB purchasing covered bonds have excited bank funding markets. It is easy to see why — liquidity is low and the market needs a leg-up. But a policy that worked two years ago won’t necessarily cut it this time round. If the central bank really wants to reignite bank finance, it should buy senior debt.
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As a piece of political theatre it couldn’t have gone better. The ICB recommends ring-fencing amid a flood of “casino banking” rhetoric, then in the very same week UBS illustrates exactly how careless investment banks can be. But arguments about bank regulation should look past the latest scandal.
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Korean regulators have occasionally appeared heavy-handed with domestic banks, but recent turmoil shows that they are right to keep a tight grip on the country’s financial system. With Korean banks so reliant on foreign currency, the regulator should be more aggressive than ever.
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The rogue trading scandal at UBS is all too familiar. This time, the financial world should take a vow never again to say that risk management has improved. Fraudsters will always find gaps in the system. The only answer is constant, aggressive and flexible surveillance.
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While the Vickers report offered some comment on senior bail-ins, investors still lack a clear picture of how they will work. Investors are lost in a fog of advisory papers, and bank funding is in crisis. Regulators and governments need to shine a light.
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To be or not to be: that is the question for those running European investment banks as they return from a holiday period that has been anything but restful.