How the Fed Is Drying Up European Banks
Published in Le Monde
(France) on 23 September 2011
by Cécile de Corbière, Dominique Gallois and Cécile Prudhomme (link to original)
(France) on 23 September 2011
by Cécile de Corbière, Dominique Gallois and Cécile Prudhomme (link to original)
Translated from
by Tabitha Middleton .
Edited by Hoishan Chan.
Is the central American banking system drying up the dollar funds of European banks? As a result of deep concerns about the progression of the crisis of sovereign debt levels in Europe and about the consequences for financial institutions, the U.S. Federal Reserve took restrictive measures toward the European financial system several weeks ago.
“It has required non-American banks to deposit assets as securities in advance, even those that aren't borrowing money,” says a source close to the Fed. “This is, above all, a way for the Fed to protect itself in the event that banks come looking for emergency loans,” so that things will go more quickly in intense situations.
Repercussions
Normally, when institutions ask for money, they deposit assets in dollars at the Fed (American Treasury bonds, hypothecs...) as securities for the loan given by the central American bank.
The measure taken by the Fed has blocked funds that the banks routinely use as securities to obtain dollars from other financial institutions (banks, investment funds). By increasing the flow of dollars, American monetary funds that provide dollars have tightened conditions for lending to European banks.
Some even speak of conspiracy, arguing that the United States, having lost their triple-A rating in August, has an interest in influencing the value of the euro in order to preserve the dollar's supremacy. And Laurence Parisot, president of the French employer’s federation Medef, recently mentioned “a very organized powwow” across the Atlantic.
Facing signs of an increase in dollar funding, the European Central Bank has opened the floodgates. On Sept. 15, it announced, with the aide of other central banks — the Fed, the Bank of England, the Bank of Japan and the National Swiss Bank, which is loaning dollars to the ECB — that it will grant three-month loans in dollars beginning in October, in exchange for assets in euros, not only in dollars.
This measure complements a weekly funding in American currency granted by the ECB, which the banks have had access to since May 2010. So far, it has been used only three times since mid-August. In fact, banks are hesitant to solicit issuing institutes, out of a fear of being stigmatized as going through a liquidity crisis.
The same thing happened in 2007 during the subprime mortgage crisis, and in 2008 when Lehman Brothers declared bankruptcy. Institutions didn't dare go to the Fed's emergency loan window, equating this approach with bad management. To work around this problem, “French banks could make a collective effort,” says one banking source.
The changes in loan terms — shorter and more expensive loans — have hit some of their activities, which were already adversely affected by a group of future laws known as Basel III. Société Générale and BNP Paribas plan to reduce their dependence on the dollar, mainly in their finance and investment departments.
In this context, their priority is to tackle loaning activities that they must fund in dollars while their deposits in American currency are insufficient: aircraft exports, ship fleets, infrastructure projects, international commerce and commercial property in the United States.
The repercussions are already being felt in the aviation industry, of which French banks are major funders. Markets fear that airlines, lacking credit, will cancel orders, which is what caused the stock of EADS, the parent company of Airbus, to fall by 7.91 percent on Thursday, Sept. 22.
“Airline companies are going to go looking for dollars where they are: in the United States or in China,” says one industry expert. The financial director of EADS, Hans Peter Ring, stated Thursday that many new banks, including many Asian banks, have arrived at the aircraft financing market.
“This is ultimately more bad news for French banks than it is for the aviation industry,” explained one financial analyst, “because they are excluded from a lucrative market which they had created a specialty in for themselves.”
“It has required non-American banks to deposit assets as securities in advance, even those that aren't borrowing money,” says a source close to the Fed. “This is, above all, a way for the Fed to protect itself in the event that banks come looking for emergency loans,” so that things will go more quickly in intense situations.
Repercussions
Normally, when institutions ask for money, they deposit assets in dollars at the Fed (American Treasury bonds, hypothecs...) as securities for the loan given by the central American bank.
The measure taken by the Fed has blocked funds that the banks routinely use as securities to obtain dollars from other financial institutions (banks, investment funds). By increasing the flow of dollars, American monetary funds that provide dollars have tightened conditions for lending to European banks.
Some even speak of conspiracy, arguing that the United States, having lost their triple-A rating in August, has an interest in influencing the value of the euro in order to preserve the dollar's supremacy. And Laurence Parisot, president of the French employer’s federation Medef, recently mentioned “a very organized powwow” across the Atlantic.
Facing signs of an increase in dollar funding, the European Central Bank has opened the floodgates. On Sept. 15, it announced, with the aide of other central banks — the Fed, the Bank of England, the Bank of Japan and the National Swiss Bank, which is loaning dollars to the ECB — that it will grant three-month loans in dollars beginning in October, in exchange for assets in euros, not only in dollars.
This measure complements a weekly funding in American currency granted by the ECB, which the banks have had access to since May 2010. So far, it has been used only three times since mid-August. In fact, banks are hesitant to solicit issuing institutes, out of a fear of being stigmatized as going through a liquidity crisis.
The same thing happened in 2007 during the subprime mortgage crisis, and in 2008 when Lehman Brothers declared bankruptcy. Institutions didn't dare go to the Fed's emergency loan window, equating this approach with bad management. To work around this problem, “French banks could make a collective effort,” says one banking source.
The changes in loan terms — shorter and more expensive loans — have hit some of their activities, which were already adversely affected by a group of future laws known as Basel III. Société Générale and BNP Paribas plan to reduce their dependence on the dollar, mainly in their finance and investment departments.
In this context, their priority is to tackle loaning activities that they must fund in dollars while their deposits in American currency are insufficient: aircraft exports, ship fleets, infrastructure projects, international commerce and commercial property in the United States.
The repercussions are already being felt in the aviation industry, of which French banks are major funders. Markets fear that airlines, lacking credit, will cancel orders, which is what caused the stock of EADS, the parent company of Airbus, to fall by 7.91 percent on Thursday, Sept. 22.
“Airline companies are going to go looking for dollars where they are: in the United States or in China,” says one industry expert. The financial director of EADS, Hans Peter Ring, stated Thursday that many new banks, including many Asian banks, have arrived at the aircraft financing market.
“This is ultimately more bad news for French banks than it is for the aviation industry,” explained one financial analyst, “because they are excluded from a lucrative market which they had created a specialty in for themselves.”