Dollar funding costs rise for European banks
The cost for European banks to
fund themselves in dollars in the foreign exchange market rose
back to their highest levels since 2008 on Monday as investors
continued to reduce loans to the region, causing them to seek
alternative ways to fund U.S. operations.
European banks have been squeezed for dollar funding as
U.S. investors, including money funds, let commercial paper
loans to banks that are exposed to peripheral Euro zone debt
roll off.
This has reduced the amount of dollar funding banks have to
run their U.S. branches, sending them scrambling to the foreign
exchange market to swap euros into dollars.
"It's getting more and more expensive for them to raise
those dollars," said Jens Nordvig, head of fixed income
research at Nomura in New York.
The three-month euro-dollar cross currency basis swap
EURCBS3M=ICAP, which falls when dollar funding costs for euro
zone banks rise, fell to minus 92.5 basis points on Monday from
minus 88 bps on Friday.
The swap looked set to retest the 2-1/2-year lows of minus
96 bps seen a week ago, but many analysts expect it to be
capped way off record lows of below minus 300 bps, hit at the
time of Lehman Brothers' collapse, supported by weekly dollar
loans provided by the European Central Bank.
London interbank offered rates for three-month dollars
USD3MFSR= also maintained an upward grind, rising to 0.30844
percent, their highest in five months. Forwards also implied
the rate will continue to rise to the 41-basis-point area by
mid-September.
"There's little to prompt improvements in money markets,"
said Commerzbank strategist Benjamin Schroeder. "For money
markets to improve you need some measures regarding the banking
system which would lead to some immediate improvement."
FOREIGN RESERVES AT FED RISE
In one potentially positive sign the amount of reserves
held by foreign banks at the U.S. Federal Reserve rose in the
latest week, stemming a decline that has seen about $131
billion withdrawn in the previous two weeks.
Foreign banks have built up a healthy buffer of dollar
reserves at the Fed, which in addition to liquidity offered by
swap facilities instituted by central banks, has reduced some
concerns that banks face the same risk of collapse as in 2008.
Investors will now closely watch the next Fed release, due
on Friday, for further signs of whether deposits have
stabilized, or are continuing to fall.
"I think we're close to getting the verdict here on whether
a 2008-type dynamic is a real risk or whether the funding
markets globally are just in a much more resilient state than
they were in 2008," said Nomura's Nordvig.
Fed data from the week ended Aug. 10 showed that deposits
rose to $813 billion from $758 billion the previous week.
It is hard to draw conclusions from the number, however,
due to the range of events driving investor behavior that
week.
Those events included the first downgrade of the U.S.
credit rating by Standard & Poor's and the introduction of a
new fee on deposits by Bank of New York Mellon Corp (BK.N) as
banks struggled to cope with the influx of deposits from
investors flooding perceived safe havens.
"We had so much going on in the week the data covered, it's
hard to say what was the dominant force," said Nordvig. "The
next datapoint is going to be more interesting because that was
more a clear-cut European-driven problem."
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