Yes, you heard me. There is some good news on the European banking system.
The past week featured a ton of bad press about European sovereign debt and banking. Yet there was one bright spot that appears to have gone largely unnoticed: The line of credit set up for European banks to borrow super-cheaply from the U.S. has gone largely untapped, or at least has not been used at anything resembling panic conditions.
Here is one top brokerage’s analysis of how the U.S. funding facility set up with the European Central Bank works, and how it has been used in the past week:
1. In early May 2010, the US Dollar/Euro funding market stressed out, and the cross-currency swap rose to -59 basis points. That same level was hit just ahead of the worst of the 2008-2009 crisis. The ECB then opened a US dollar lending facility on May 10, 2010, that remains open. The transaction size is unlimited and the price has a cap.
2. Last week, a European bank tapped the line for half a billion dollars. It was the first request since March of this year. Yet that was a small amount. It would be bad if European banks were tapping the facility with the same ardor as they did a year ago or in early 2009, but so far it’s not even close.
3. The brokerage concludes that current usage of the facility is very low by historical standards. Currently the level is said to be only $500 million, compared to the early 2009 peak of $300 billion. There was some concern that the Swiss national bank had accessed the line, but that may have been for only a short time at the start of the month, and it is not accessing it now.
4. Elsewhere, Andrew Haldane, the Bank of England’s financial stability chief, reminded the London Telegraph this weekend that global banks have raised equity by $500 billion since the 2009 crisis. They have slashed assets by $3 trillion, and halved leverage ratios from 40:1 to a level near the long-term average, at 20:1. ”UK and US banks’ cash ratios are at their highest levels for several decades,” he told the Telegraph.
Bottom line: Despite the panicky mood, there is little to no demand for emergency funding from the U.S./ECB dollar lending vehicle, and bank balance sheets are at their strongest in years. That’s a huge positive that is not surfacing in the media. If this changes, I will let you know.