Bank funding access could ease after Europe tests

* Positive market reaction, second tier reopening eyed

* Third tier still locked out of funding markets

* Debate on tests being too soft continues

By Alex Chambers

LONDON, July 26 (BestGrowthStock) – A number of European banks may
soon find it easier to fund their business after regulators
probed the health of their industry across the continent, though
the weakest players will struggle for longer.

“Not a lot has changed but perhaps the market will recognize
that there is more strength in the system than some had thought.
Several boxes have been ticked,” said Martin Egan, global head
of primary markets at BNP Paribas.

Equity and credit markets gave last week’s results the
benefit of the doubt on Monday, taking at face value the finding
that only seven out of 91 banks failed a test of whether they
could withstand another severe economic downturn.

More easily available bank funding would be a good result
for politicians, under fire for their role in a crisis that left
only the strongest banks able to fund themselves directly in the
bond market. [ID:nLDE60Q278]

Other banks — especially those in the weaker euro zone
economies — have increasingly relied on the European Central
Bank, which has a number of funding programmes in place.

Spanish and Portuguese banks borrowed a record 136 billion
euros and 40 billion euros respectively from the ECB in June.
[ID:nLDE66C1RA] [ID:nLDE66K16I]

Since the onset of the sovereign debt crisis this year, only
the top tier of European banks enjoy an unlimited abilty to fund
themselves directly via the bond markets, with the second tier’s
access intermittent, and the third tier shut out.

Egan said it it would be a day or so before it would be
clear whether investors are ready to fund the second tier of

“Does that mean now we no longer have a three-tier market
for financial issuers? Unfortunately no, at least for the time
being,” said Robert Ellison, deputy head of the financial
institutions group, debt capital markets at UBS.

Europe found fewer banks failed than markets had expected in
the eagerly awaited stress tests [ID:nNN2516007] and only 3.5
billion euros ($4.52 billion) in equity needed to be raised,
though a much larger group scraped past narrowly.

The Markit iTraxx credit indices had already rallied
significantly heading into the tests, and the European senior
financials index tightened by a further 5 basis points to 126
bps on Monday indicating a diminishing fear of default. It stood
at 164 bps at the start of the month.

“Whether or not we agree with the methodology of the
exercise at least there is a lot more disclosure about the banks
now,” said UBS’s Ellison.


The assessments by Europe’s regulators could ease a severe
system blockage — matching large piles of investor cash with
banks’ need to refinance 3.3 trillion euros of senior debt, half
of it due in 2010-2012, according to Morgan Stanley estimates.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Take a look at stress test stories [ID:nNN2516007]

Click for graphic on European banks’ looming maturities
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ But banks are unlikely to move in large numbers to sell debt
just yet as long as investors are still absorbing the
information provided.

And for third-tier players, the markets will likely remain
shut altogether.

“It does not feel like we’ll see investors really jump in
too deep right now,” said Egan.

The European primary debt market normally slows down anyway
during the European summer as issuers enter information blackout
periods ahead of results and investors take a break.

That might change if the new-found positive sentiment around
the economy continues, and investors might turn to the lesser
names if the best banks spreads tighten too fast.

For now, the debate will focus on aspects of the test such
as how sovereign debt exposure was treated, whether total tier 1
capital is an appropriate measure for solidity, and if the
capital threshold of 6 percent ratio was too low.

“The question is on which side the weight of subjective
opinion comes down,” said Alan Patterson, of Amias Berman & Co,
a broker and advisory firm.

Investment Analysis

($1=.7746 Euro)

(Reporting by Alex Chambers; Editing by Douwe Miedema)

Bank funding access could ease after Europe tests