So Europe's all better now, or something. The banks are anyway. They have had the money flung at them, in the form of the European Central Bank advancing them tons of medium-term funding at attractive rates and with pretty chill collateral requirements, and now they just have to sit back and be awesome.
Since they're now all flush and awesome, various people have come out of the woodwork to help them spend their money. (I'm happy to help too! Call me!) One possible answer is "bail out your reprobate governments," which FT Alphaville have dubbed the "Sarko trade" after a guy who said this:
French President Nicolas Sarkozy said the ECB's increased provision of funds meant governments in countries like Italy and Spain could look to their countries' banks to buy their bonds. "This means that each state can turn to its banks, which will have liquidity at their disposal," Sarkozy told reporters at the summit in Brussels.
Alphaville point to a equity research note by Morgan Stanley, who estimate that the size here is maybe less than Sarkozy hoped for but much, much more than zero. You can have various views on the desirability and/or plausibility of this.
Another thing the banks could do is take all these gobs of money and actually go lend it to people to, like, buy Portuguese villas and stuff. This seems very broadly speaking like a good thing for them to do, since banks lending to people and businesses is sort of their job. One guy likes this idea:
Mario Draghi, president of the European Central Bank, has urged commercial banks to exploit radical new measures taken by the ECB to increase liquidity in the European banking system, in order to maintain lending to the real economy and prevent a renewed credit crunch. “We want to make it absolutely clear that in the present conditions, where systemic risk is seriously hampering the functioning of the economy, we see no stigma attached to the use of central banking credit provisions,” he told an audience in Berlin in his first public speech at the head of the ECB. “Our facilities are there to be used.”
Someone else who likes this idea is Goldman Sachs, where Draghi used to work, which, COINCIDENCE? Yesterday FT Alphaville wrote about Goldman's equity research note from Tuesday on European banks. And as Alphaville points out, the ECB's willingness to take commercial loans as collateral should make commercial lending more attractive than it used to be.
So that's nice. A quick thing to notice, though, is that these research notes are not MS and GS economic research telling you whether you should buy that new washing machine or hide under your bed with a shotgun and some gold bullion. They're bank equity research notes, meaning that they're intended to help you figure out whether you should invest in the equity of those banks. And they do. MS:
And on banks stocks, we think the policy response materially helps reduce systemic risk and is longer-term helpful, although there are numerous cross currents. Whilst we are bearish on bank earnings, we think as policy moves look to reduce tail/systemic risk, multiples should move up – given the 80%
correlation between bank stocks and southern/peripheral sovereign spreads.
Fine, whatever, may not help earnings but even bank shareholders like it when their banks don't go under. But GS is more willing to see dollar signs, and even the numbers that come after them:
Finally, the overall P&L impact of new ECB bank funding arrangements is difficult to gauge. Below, we have simplistically assumed that the use of the facility carries a funding cost relief of between 100-400bp. The latter is the difference between current market rates for sovereigns (or current customer deposit rates) compared to the 1% rate at the ECB. Commercially, the ECB facility is attractively priced and has the capacity to impact current (low) levels of overall bank profitability meaningfully. The effect will clearly differ among individual banks.
So that would be more than zero then. (And it has to be right, right? Cheaper funding + more lending + higher NIM = more profits, right?)
Maybe I'm just reading the wrong people (to be fair, Morgan Stanley and Goldman, so probably!) but you know what suggestion I haven't heard? "Turn down the funding and stand on your own two feet you deadbeat jerks." Which makes sense because Sarkozy's and Draghi's suggestions are, y'know, better suggestions than that. Keeping the European project afloat and/or lending to people and businesses to keep the real economy going are good things. Limping along for a while and then imploding in an orgy of recrimination and rehypothecated-funds-stealing are not.
But it's worth keeping that reaction in mind when you think about the ECB funding facility because the best imaginable outcome here goes something like this:
(1) ECB funds European banks;
(2) European banks fund their deadbeat governments, solving their liquidity crises;
(3) European banks also fund European businesses, minimizing the effects of fiscal austerity and leading to growth in the eurozone economy and tax base, solving Europe's solvency crisis;
(4) everybody is thrilled; and
(5) particularly thrilled are the banks, who both avoid systemic meltdown and have higher revenues and cheaper funding. For the layman, that means that someone comes to their offices and hands them sacks with dollar euro signs on them.
And that process looks a little familiar. Well, not steps (2), or (3), or (4). But lender-of-last-resort-funds-banks-which-then-survive-and-make-money is a familiar story and it pisses people off. It drives some people insane, leading them to do things like somewhat seriously claim that the Fed loaned banks $29 trillion dollars. (Noteveryoneagrees.)
In a way it's funny to read Mario Draghi - and GS and MS - fretting about the "stigma" of using ECB funding. There is, to be fair, a real empirical question about this; for what it's worth I mostly buy GS's claims that usage of the ECB's USD facility and the competitive advantages of participation will quickly overwhelm the "stigma" effect where banks don't take cheap loans because they worry it will make them look weak. But the real stigma of the ECB program will come much later, when everyone forgets how much they wanted European banks to make good use of this money and just remembers how much profit the banks got out of it.