Scrutinising Europeank bank funding
Conflicting messages this morning on Europeank bank funding. From Bloomberg:
European banks, shunned by investors and each other, may borrow as much next month from the European Central Bank as they did in a record offering in December as they seek refuge from frozen funding markets.
There are two arguments supporting this statement. The first one is technical and refers to the fact that the ECB is again (carefully) widening its list of acceptable collateral and the banks will (rationally) take advantage of that. The second is obviously macro-economic sentiment (“shunned by investors”), but it’s not at all that clear that it holds anymore. In fact, it seems that the signaling function—the ECB will act as the lender of last resort—associated with the refinancing operations is working. Says FT Alphaville:
US money market funds have begun moving back into European bank paper, a sign that central bank efforts to backstop key institutions are improving risk appetite
There other other indicators that the ECB operations are working, most notably falling yields on sovereign debt, and they should, since it is in effect the same recipe as the one used by the Fed and BoE, just implemented a little later.
