Where European banks stand on liquidity, as coronavirus profit warnings rise

According to a study by S&P Global Market Intelligence, many major European banks entered the coronavirus crisis with their liquidity situation worsening, even as the European Central Bank resorted to paying banks to maintain liquidity.

The Italian Banca Monte dei Paschi di Siena SpA, the British Standard Chartered PLC and the French Société Générale SA are among the banks which saw their liquidity coverage ratios drop in the last quarter of 2019 compared to the three previous months. The ratio measures the ability of banks to withstand cash outflows and is calculated by dividing a bank’s stock of high-quality liquid assets by the total net cash outflows over a 30-day period.

The S&P Global Market Intelligence sample includes 33 leading financial institutions in Europe. Of these, 10 reported a quarter-over-quarter decline in the ratio or no change, while 17 reported an increase. For six companies, data was not available.

Leading banks like StanChart, HSBC Holdings PLC, Danske Bank A / S and Raiffeisen Bank International AG have already said they will miss their profitability targets this year in what HSBC has called a “difficult environment”.

Banks are likely to see customers dip into revolving credit facilities as sales and profits dry up across Europe. Many companies have seen their financial goals shattered – airlines British Airways and Lufthansa have warned of drastic schedule cuts, and consumer, travel and tech companies such as sportswear company Adidas, the cruise line Carnival and Dutch company NXP Semiconductors have all warned of a coronavirus-related impact.

Emergency measures

The ECB and the Bank of England have both taken emergency action to ensure that banks continue to lend to distressed corporate clients.

Christine Lagarde, President of the ECB, unveiled a series of measures last week to support banks and maintain liquidity flows.

They included the central bank‘s offer of cheap liquidity auctions in which the ECB effectively pays banks to borrow money. This would pay banks 0.75% interest to accept the money offered as long as they keep business lines of credit open.

The ECB’s deposit rate is minus 0.5%, although Lagarde did not cut it further last week despite market expectations, so banks will receive 0.25% interest on loans of the ECB. The ECB has also increased the amount that banks can borrow through auctions, known as Targeted Longer-Term Refinancing Operations, or TLTROs, to 50% from 30% of their stock of eligible loans – the amount that banks can borrow is reduced by the amount they have previously borrowed in similar operations by the ECB.

The bank has also added € 120 billion to its existing asset purchase program, while its watchdog will leave banks short of some key capital and liquidity needs to maintain credit.

European countries are taking their own measures to keep credit flowing: Denmark, for example, eased its monetary policy by releasing the banks’ emergency buffer and also offered cheap loans to banks.

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bank of england

The Bank of England took similar action while cutting its interest rate to 0.25% from 0.75%. It reintroduced a term finance program providing loans to banks as it did during the 2008 global financial crisis.

This time around, his program is aimed at small and medium-sized businesses and, based on the adoption of his term finance program from 2016, he estimates that this new program could provide funding in excess of £ 100 billion. sterling. Over the next 12 months, the TFSME program will provide four-year financing of at least 5% of the real economy bank loan stock at interest rates close to the discount rate.

The UK government has also announced measures to strengthen the effectiveness of the country’s response to the virus crisis, including a £ 330 billion government backed and guaranteed loan package to support businesses. he offered to cover most of the losses on corporate bank loans, so that banks can “lend with confidence” so that funding does not dry up.

According to data from S&P Global Market Intelligence, Sweden’s Skandinaviska Enskilda Banken AB has the highest liquidity ratio at 218.3%, up 44.2 percentage points from Q4 2019, while Spain’s Bankia SA was in second place with a ratio of 204.0%.

Meanwhile, French bank Societe Generale SA was at the bottom of the list, with a ratio of 119%.