New York, June 16, 2011 -- Over the past year, the global banking system has modestly reduced
its reliance on wholesale funding and lengthened the maturity of new debt
securities, according to Moody's Investors Service's
latest bank debt maturity profiles report. Nevertheless,
the rating agency notes that the favorable market conditions supporting
low-cost deposits and low-cost bank debt will not continue
indefinitely, leaving the global banking system exposed to refinancing
risk at a time when an usually large amount of debt is coming due.
Of the $11 trillion of the long-term wholesale debt outstanding
from Moody's-rated banks globally, $3.4
trillion (33%) will mature by the end of 2012, and $4.9
trillion (45%) by the end of 2013.
Moody's new report dimensions the debt liability and maturity profile
of bank debt globally, as well as individually for more than 30
key banking systems.
"Our latest report indicates that the share of market-based
bank funding declined globally from about 40% of total bank debt
liabilities in 2007 to about 35% in 2010, mainly driven by
an increase in deposits," says Vice President and author of
the report Jean-Francois Tremblay.
Additionally, after the average tenor of bank debt securities reached
its shortest duration in the years preceding the crisis, the contractual
maturity of new long-term debt issued since the beginning of 2010
has bounced back to levels that are more in line with historical trends.
"Globally, the average maturity of wholesale debt issued in
2010 stood at 5.6 years, compared with 4.2 in 2008,"
Tremblay notes. The lengthening of maturities continued in 2011,
with 7 years being the average maturity of debt issued during the first
quarter.
But Moody's notes that the relatively favorable conditions under
which banks have dealt with maturing debt to date won't continue
indefinitely.
"Banks have taken advantage of low interest rates, a return
of investor confidence, the growth of deposits, and an increase
in central banks' temporary funding facilities to refinance recently
maturing debt," says Tremblay. "But banks and
their creditors need to be prepared for new challenges and the potential
for worsening conditions."
While noting that many banks have been able to regularly access the market,
the rating agency foresees three challenges in the near to medium term
that may increase refunding risk for banks that heavily rely on wholesale
debt.
The first challenge is that the conditions attached to central bank liquidity
facilities will become more stringent, forcing banks to look for
market-based solutions in future refinancings.
The second challenge is that government support that has traditionally
benefited creditors, such as recapitalizations and debt guarantees,
will be provided on a more selective basis. As support diminishes,
the risk premium the market demands on unsecured bank debt will likely
increase and drive up the cost of funding.
The third challenge, which could occur in concert with the above
developments, is that rising interest rates would not only drive
up wholesale funding costs but also make it more difficult to maintain
deposit levels, as investors would increasingly seek more attractive
options elsewhere.
"We conclude that the most likely scenario for banks that rely heavily
on wholesale funding going forward is reduced profitability due to an
increase in funding costs," Tremblay notes.
The report contains an examination of more than 30 banking systems and
is available on moodys.com. It is titled "Bank Debt
Liability and Maturity Profiles -- 2011 Update."
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New York
Jean-Francois Tremblay
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Gregory W. Bauer
MD - Global Banking
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
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Moody's: Upcoming peak in maturing bank debt occurring in an uncertain environment