Bank capital is about price, not quantity

As previously discussed, there is no numerical limit to the amount of available bank capital.

It’s about price, not quantity.

Borrowing by Europe’s banks soars

September 12 (FT) — European banks are borrowing at their fastest rate in almost six months and are set to continue exploiting a positive market mood in spite of longer-term funding concerns and worries about the economic health of weaker eurozone governments.

Financial institutions in the region last week raised $20.5bn, their busiest week since March, according to Dealogic. Bankers expect similar data this week.
Institutions tapping the market included Santander unit Abbey National, BNP Paribas, UniCredit, Banesto, Banco Popolare and Lloyds Banking Group.

The renewed investor appetite will come as a relief to many banks. The bank debt markets virtually froze in May and June as the eurozone sovereign debt crisis erupted, putting some banks behind with their funding plans. September is typically a busy month as investors and bankers return from summer breaks with only three full months left before activity subsides again in December.

The borrowing comes as the Basel Committee on Banking Supervision met at the weekend to hammer out final capital rules that will force banks to raise their capital cushions further in the coming years.

Last week was also notable because it included a handful of deals from second-tier banks in weaker eurozone countries.

“Now it’s not just the national champions,” said Vinod Vasan, European head of financial institutions for debt capital markets at Deutsche Bank, who noted that some smaller Spanish banks had issued covered bonds, a form of ultra-safe securitisation that gives investors recourse to the bank if the underlying assets decline.

Bankers had feared that this month’s bond market would be disrupted by concerns about banks’ ability to refinance debt.

Ireland’s banks have been hit by these worries because they are due to repay about €25bn of debt this month as a 2008 government guarantee wears off. A new guarantee was put in place last week and analysts expect Bank of Ireland to test market interest in the next few weeks.

But some bankers caution against believing that the bond markets are fully open for all financial institutions. “National cham pions still have funding needs,” said Chris Tuffey, co-head of Credit Suisse’s European credit capital markets group. “So if there is investor appetite, they’ll be the ones to nail it.”

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2 Responses to Bank capital is about price, not quantity

  1. JKH says:

    “As previously discussed, there is no numerical limit to the amount of available bank capital. It’s about price, not quantity.”

    I assume this is just a macro generalization/ derivative of “loans create deposits”.

    Still, there’s a fundamental difference in the stock constraint for capital (required to absorb risk and unexpected losses), and the stock constraint for reserves (non-existent, or unnecessarily self-imposed).

    Reply

    WARREN MOSLER Reply:

    not sure what you are getting at? markets/prices will adjust to any capital requirement and lending will continue

    Reply

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