TAILIEUCHUNG - European bank funding and deleveraging

Increased financing from other banks and bond market investors largely compensated for the cuts made by European banks in the final quarter of 2011. As a result, the overall volume of new syndicated and large bilateral loans was essentially the same as in the third quarter. In trade finance, for example, a strong balance of Asia-based lenders reported increased demand (Graph 6, right-hand panel) and these and other non-European lenders ensured that financing of trade did not fall overall. More generally, types of lending mostly denominated in dollars were quite steady in aggregate, even though contributions from European. | European bank funding and deleveraging1 Asset prices broadly recovered some of their previous losses between early December and the end of February as the severity of the euro area sovereign and banking crises eased somewhat. Equity prices rose by almost 10 on average in developed countries and by a little more in emerging markets. Bank equity prices increased particularly sharply. Gains in credit markets reflected the same pattern. Central to these developments was an easing of fears that funding strains and other pressures on European banks to deleverage could lead to forced asset sales contractions in credit and weaker economic activity. This article focuses on developments in European bank funding conditions and deleveraging documenting their impact to date on financial markets and the global economy. Funding conditions at European banks improved following special policy measures introduced by central banks around the beginning of December. Before that time many banks had been unable to raise unsecured funds in bond markets and the cost of short-term funding had risen to levels only previously exceeded during the 2008 banking crisis. Dollar funding had become especially expensive. The ECB then announced that it would lend euros to banks for three years against a wider set of collateral. Furthermore the cost of swapping euros into dollars fell around the same time as central banks reduced the price of their international swap lines. Short-term borrowing costs then declined and unsecured bond issuance revived. At their peak bank funding strains exacerbated fears of forced asset sales credit cuts and weaker economic activity. New regulatory requirements for major European banks to raise their capital ratios by mid-2012 added to these fears. European banks did sell certain assets and cut some types of lending notably those denominated in dollars and those attracting higher risk weights in late 2011 and early 2012. However there was little evidence that actual or .

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