The run on European banks picks up steam

As predicted several months ago under the FDR Framework and subsequently chronicled, as confidence in European banks and European sovereign debt evaporates, the European banks are experiencing a bank run.

Just like in 2007, the leading edge of this bank run is interbank lending.  Just like in 2007, the lack of disclosure of current asset and liability-level data makes it impossible for banks to determine which of their competitors is solvent and which are not solvent.  As a result, banks stop lending to each other.

The Financial Times ran an article that shows that interbank lending bank runs are spreading across Europe.

Europe’s debt crisis has stoked tension in its interbank lending markets as some financial institutions find it harder to raise money ahead of bank stress tests due on Friday. 

UniCredit and Intesa Sanpaolo, Italy’s two biggest commercial banks, have been asked to pay higher premiums for lending, according to brokers, as the crisis has hit Italian government bonds amid growing fears of contagion. 

One broker said: “Lending is now very name specific. Banks will only lend to high-quality banks or names. Italian banks, in particular, have had difficulties this week. They can only access the markets if they pay big premiums. Other banks will not lend to them unless they pay up.” 

David Owen, chief European financial economist at Jefferies, said: “This eurozone crisis is a banking crisis as much as anything. Confidence among the banks has been undermined by Italy’s problems and there is a fear the stress tests will reveal problems.” 

The key measure of credit risk for short-term bank lending has jumped sharply since the start of the month. The spread between the risk-free cost to lend overnight in euros measured by Eonia and the cost to lend for three months measured by Euribor has jumped to 29 basis points from 20bp on June 30, a rise of 45 per cent... 

The jitters have caused problems for banks’ longer-term borrowing too. In the past six weeks, European banks have sold $19.1bn of senior unsecured debt – less than a third of the average $68.2bn they sold in the past five years during this period, according to data from Dealogic. 

Senior unsecured bonds form the biggest chunk of any bank’s financing efforts. But even sales of covered bonds, the loan-backed deals popular with investors who consider them ultra-safe, have slowed. Banks have sold $27.7bn in the past six weeks, compared with an average of $42.6bn for this period.