Short-dated securities issued

With borrowing estimated to hit a record 1.2 gucci bags outlet trillion euros after a second auction later this month, banks may save 120 billion euros over three years. That could boost 2012 profit by about 10 percent for lenders in Italy and Spain, according to estimates by Morgan Stanley.
“This is very much a free lunch,” said Arnd Schaefer, an economist at WestLB AG in Dusseldorf, Germany. “Banks can get money for just 1 percent and then lend it on for much more. That’s pretty good.”
The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year and funding from U.S. money markets disappeared. Any bank in the region can borrow an unlimited amount, provided it pledges eligible collateral. Lenders won’t face curbs on bonuses or dividends.
‘Cheap Money’
“The central bank has pumped the market with unbelievably cheap money because wholesale markets are closed,” said Richard Reid, director of research at lobby group International Centre for Financial Regulation in London and a former managing director at Citigroup Inc. “Stronger banks will inevitably profit, but that is a secondary issue for the ECB.”
Niels Buenemann, an ECB spokesman, declined to comment.
Banks are required under rules approved by the Basel Committee on Banking Supervision to hold capital against any assets they pledge as collateral in exchange for the ECB loans, pushing the cost of participating above 1 percent, Guy Mandy, a London-based Nomura Holdings Inc. analyst, said in a Jan. 24 note. Assets are subject to so-called haircuts depending on how risky they’re perceived to be. That affects how much cash lenders will receive against the value of the assets.
A bank that pledges a book of loans with a five-year maturity subject to a 29 percent reduction in value would face an “all-in” cost of about 2.5 percent a year, Mandy said.
Second Auction
Lenders could take 680 billion euros of loans at the second auction on Feb. 29, according to a Goldman Sachs Group Inc. survey of investors published last week. That would raise total borrowings from the ECB’s longer-term refinancing operation, or LTRO, to a record 1.2 trillion euros, surpassing the $1.2 trillion in peak lending by the Federal Reserve to U.S. banks after Lehman Brothers Holdings Inc.’s 2008 collapse.
Banks including Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs reaped an estimated $13 billion by borrowing cheaply from the Fed and lending at a higher rate, according to data compiled by Bloomberg from central bank records of transactions obtained by court order and under the Freedom of Information Act. That figure, based on the lending margins of 190 banks that borrowed from the Fed, outlet gucci bags isn’t comparable to the estimate of the ECB subsidy.
‘Money-Making Opportunity’
“You are certainly going to get banks that don’t need the funds profiting,” said Richard Werner, an economist at the University of Southampton, England. “It would be much cheaper to target support for the 20 or so banks that need it, but politically the central bank wants to be seen to be neutral. It is a massive money-making opportunity for those who don’t need it to play the yield curve.”
European lenders are being encouraged by policy makers to use the ECB cash to purchase domestic sovereign debt, pushing down borrowing costs for governments and reducing the risk that one or more countries in the region default.
An Italian bank could borrow 1 billion euros from the ECB at 1 percent and use the proceeds to purchase three-year Italian bonds yielding about 3.60 percent. That so-called carry trade could boost income by 26 million euros a year.
‘A Masterstroke’
Short-dated securities issued by southern European countries have rallied since the ECB announced the offer Dec. 8. Yields on two-year Spanish notes have fallen 220 basis points to 2.77 percent, while their Italian equivalents dropped 308 basis points to 3.07 percent. A basis point is 0.01 percentage point.
Longer-dated securities underperformed shorter-duration notes on concern that austerity plans won’t plug deficits and reduce Europe’s debt load. Ten-year Spanish bond yields have fallen 85 basis points to 5.27 percent, while their Italian counterparts have dropped 133 basis points to 5.59 percent.
“In many ways this has been a masterstroke,” said Charles Goodhart, a London School of Economics professor and a former Bank of England policy maker. “People have been asking the ECB to implement quantitative easing on a large scale without invoking the wrath of the Germans and provoking statements about helping undeserving southern Europeans. This is it.”
Some banks, rather than heed calls by politicians to boost lending to companies and consumers, are choosing to deposit the money in the ECB’s overnight facility at a rate of 0.25 percent until they need it to refinance maturing debt. While that’s costing them 0.75 percent, outlet gucci shoes it’s still a saving on the potential expense of issuing bonds to private investors.