Europe's Funding Scramble: Peeking Below The Calm Surface Waters Of French Bank Liquidity (And Lack Thereof)

Tyler Durden's picture

That European wholesale, and particularly dollar, funding has been "problematic" in past weeks is an understatement. One merely needs to look at the Fed's recent expansion in its transatlatnic swap lines to figure out that someone, somewhere is struggling to meet their USD-denominated obligations. However, is it just one bank, as recent data out of the ECB suggest, or is this merely a symptom of a far more acute underlying cause? Alas, as Barclays' Joseph Abate confirms by looking at the transformation in funding patterns within that most fulcrum of European banking systems - that of France - the threat is far more prevalent than has been speculated. In fact, based on the rapid transition in funding from unsecured to secured lending markets within French banks in general, and one name in particular, it seems that while SocGen stock may have avoided its daily rout courtesy of the extension in the short selling ban, there is a far greater concern for the bank: one of maintaining orderly daily operation funding. And there is little that European stock market regulators can do to restore liquidity, aka confidence, once it starts evaporating. Which it has... although mostly in unsecured markets... for the time being. Should secured funding (ABCP and Repo) wilt next, then it gets really, really bad. To wit: "Bank funding worries have flared up again with the news that the Federal Reserve’s currency swap line with other central banks has been tapped at least twice this month. The trivial amounts borrowed belie significant wholesale funding stresses for some institutions in dollar markets." Let's take a look at what "some" means...

Abate's summary:

  • Total financial CP outstanding is down 15%, or $90bn, since the start of June. Foreign bank outstandings are down nearly 20%, accounting for almost half of the decline in total financial CP over the period.
  • WAMs have shortened as issuance piles up in overnights and replaces longer tenor (3m) paper. Average overall daily financial CP issuance has fallen to $3.5bn since June – down more than 50% from the average pace between January and May.
  • The reduction in prime money fund holdings of French paper has been comparatively small – about $15bn in July. However, the decline probably accelerated in August.
  • Given their confidence shock and the market’s sensitivity to bank funding news, it will probably take some time before prime funds return to unsecured lending markets. Repo and demand for bills (along with AB-CP) should therefore remain robust through the fall.

Step 1 is admitting you have a problem...

Although the pullback in dollar funding for these banks has not reached crisis proportions given their large liquidity cushions, it has likely caused some banks to reduce their activity in dollar markets. Operations such as matched books and securities stockpiling that require access to large amounts of dollar funding are being scaled back.

...Alas, nobody is prepared to do that yet. Which means the dollar will have to do it for them. And it already is, pretty much everywhere, except Libor:

Bank funding markets can’t seem to catch a break. After some calm in 2009, worries about exposures to sovereign credit have flared up several times since 2010. And although the current flare has not pushed LOIS up as dramatically as in early 2010, it has pushed term LOIS about 20bp wider in 2012 (Figure 1). The modest reaction in spot Libor, however, belies significant strains in the market. Indeed, news that the Fed’s currency swap program was tapped at least twice this month for trivial, one-week amounts set off a  firestorm of super-heated press coverage. As we have written, these borrowings are expensive and likely represent the actions of small banks completely shut out of dollar funding markets. They are by no means representative of the behavior of large, multi-national global institutions. That said, speculation and concerns are likely to continue in an already-nervous marketplace, but the signs of true financial stress lie elsewhere.

Unsecured funding in the form of non-AB Commercial Paper is now virtually frozen:

While the borrowings from the Fed’s liquidity program have taken center stage, the financial stress experienced by the largest banks has shown up primarily in the CP market, where banks are finding it more difficult to raise dollars. Financial CP outstanding has  declined by 15%, or $90bn, since the end of May (Figure 2). And the decline in paper outstanding from foreign institutions has also been acute – down nearly 20%. By contrast, domestic outstandings are down 3% over the same period. (Domestic issuers with foreign bank parents have experienced the biggest decline in outstanding paper – down 24% since the end of May)

It gets better... er, worse.

Troublingly, the decline in outstandings has been accompanied by a sharp change in issuance patterns. Daily issuance has fallen from an average of $7.4bn/day between January and May to $3.5bn/day since the start of June. At the same time, the issuance has  become much shorter. Paper with an original maturity of more than three months has declined from 15% of total issuance in May to 10% so far in August. The result is that the WAM of all CP outstanding has contracted two days since the end of July. In effect, investors (typically money funds) are rolling less paper, and at a shorter maturity than earlier this year, reflecting their unwillingness to take on term unsecured bank risk.


Compared with the behavior of the commercial paper market during the first sovereign flare-up in spring 2010, the decline in outstandings has been a bit steeper (Figure 3). Outstanding financial paper declined by nearly 10% in the nine weeks following the  April 27, 2010, S&P downgrade of Greek sovereign debt. By contrast, in the nine weeks after June 1, outstanding financial paper has declined by 15%.

Sorry Italy, this time nobody cares about you. It is all about AAA-rated (not for long) France:

In recent weeks, particular attention has been focused on French banks and their access to dollar funding. But how much has their funding declined? The Federal Reserve does not break out the CP data by the origin of the bank’s headquarters. However, the CP figures ignore other sources of French bank dollar funding – particularly Yankee CD issuance, which for most global banks is a much larger portion of their financing, as well as repo. Although imprecise because it ignores other cash lenders, we reckon we can estimate the total amount of French bank dollar funding by examining trends in the money fund holdings.


Four banks (BNP, Societe Generale, Natixis, and Credit Agricole) account for nearly all the money fund exposure to France. As of July 29, total money fund holdings of these banks’ paper – in deposits, repo, and commercial paper – amounted to 8.6% of institutional prime fund balances. By contrast, at the end of June, these banks accounted for 9.0% of prime institutional balances. Fitch puts the money fund exposure to these four institutions at around 11% of its sample of the ten largest prime money funds, mostly unchanged from the end-of-July ratio of 11.2%. The difference between our calculations of prime fund French exposure and Fitch’s estimate reflects the fact that the latter is based on a sample of the largest prime funds, while ours is based on the entire universe. Clearly, the 60% of the funds outside of the Fitch sample hold little to no French paper, so the aggregate holdings (8.6%) are smaller than Fitch’s estimate of 11% from the bigger players.


At first blush, French bank dollar funding from the nearly $1trn prime institutional money fund industry appears to have hardly changed – falling by less than $15bn, to $79bn at the end of July. Our calculation is only $5bn more than the amount of the reduction implied by the Fitch figures. The estimated $15bn reduction across all front-end instruments is smaller than the reduction in foreign bank CP (including domestic banks with foreign parents) during July, which totals $30bn. In other words, the contraction in foreign bank CP outstanding has not been exclusively a French bank story; other banks’ access to unsecured funding has also retreated.

How about second blush?

We believe that the relatively small reduction in money market funding of French banks belies a significant change in the composition of that financing. We split the funding from prime institutional money funds into secured (repo and asset-backed CP) and unsecured (primarily deposits and CP) for each of the four banks in both June and July. The figures reveal that the two largest money fund funders (BNP and SocGen) – kept the level they borrowed from these money funds constant in July (at roughly $25bn each) by shifting from unsecured to secured instruments. For instance, the proportion of BNP unsecured funding from prime funds declined from 76.2% in June to 72.6% in July. Likewise, SocGen reduced its unsecured financing from 95.3% to 83.8%. The remaining institutions, by contrast, did not change their funding mixes, which remain heavily skewed to deposits. Between them, they saw their funding from money funds decline by an average of 36%, accounting for all of the small reduction in French bank CP funding. Thus, the French banks have reacted to market funding concerns mostly by altering the composition of their funding – reducing the amount of deposits and commercial paper they sell to prime money funds while increasing their repo borrowings.


Of course, it may be premature to dismiss a sharper decline in money fund holdings of French banks’ short-dated paper and a deeper contraction in their access to dollar funding. In the weeks since the end of July, foreign bank CP has contracted by an additional $30bn. And it is possible that there has been a further reduction in deposit and repo holdings. However, these updated data will not be available until mid-September. More important, is a reduction in access to front-end financing a significant problem for foreign banks?

So we have an unsecured paper funding crisis. Now what? Why, enter the Fed of course, which again generously bailed out foreign banks with a massive dollar deposit surge as reported first by Zero Hedge. Ah yes, but the nearly 20% drop in USD deposit balances at the Fed is the clearest warning sign that not even the Fed is bailing out Europe's banks properly any longer.

From the perspective of the European banks, the reduction in their money fund financing is significant but not incapacitating. These institutions have so far nimbly shifted the composition of their funding toward more secured alternatives to reduce the effects of the reduction in money market funding. And as many have already noted, non-US institutions have a surplus of dollars – most of which currently reside at the Federal Reserve. Foreign-related banks currently have an estimated $700bn on deposit at the central bank – of which an unknown but large proportion is owned by European banks. The decline in these balances since the end of QE2 in June, however, suggests that the increased difficulty of raising dollar funding may be causing these banks to cut back on operations that require plentiful access to dollar funding – such as their matched books and securities inventories.

This is just the beginning...

These banks are by no means desperate to raise dollar funding. Instead, they appear to be mostly holding the line on borrowing costs, refusing to chase yields higher. This (and their long dollar positions) is a reason the increase in Libor since its mid-June trough has been so mild – certainly compared with the 2010 sovereign flare-up. Of course, no bank – domestic or foreign – can survive for long without access to dollar funding. Instead, their thick dollar liquidity buffers and the winding down of certain dollar-heavy businesses buy banks several months and some flexibility such that the 60bp priced into the December ED contract seems a bit extreme.

As always, Libor is the last to go: first very slowly, then very fast, as the entire French banking system, once one reads between the lines of the above, finds itself in funding limbo, and it last lifeline, that of secured repo funding, disappears. At that point we will be talking not about $500 million in USD swap lines going to rescue French banks, but vicious orders of magnitude greater.

We just hope this latest market realization of facts happens after Labor day: is it too much to ask for at least one week without the world blowing up, please? Plus the higher stocks go up in the interim, the more fun it will be to short from a higher vantage point.

Lastly, we are confident that uncle Warren is currently taking a bath with an atlas of Europe, feverishly trying to come up with his latest Eureka moment.

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baby_BLYTHE's picture

yeah despite the recently volitlity in all markets, Gold still isn't buying the BS. I have faith the second half of this year, especially mid-September the miners will also reflect this, ZIRP till 2013 alone guarantees it! They will cheapen the dollar realitive to all other currencies (+Gold, Silver and Crude Oil) until it completely implodes the world monetary system. Benocide is frothing for REAL hxc Inflation to erode /cheapen our outstanding real debt by at least 50% until his current chairsatanmenship ends in 2013. 

In simplicity, we are doomed. Got Gold? 

Jasper M's picture

In fairness, Baby (I Can call you Baby, can't I?), do you Really suppose the Fed can enforce 2 years at ZIRP? I call bullshit on that; Myth of the Potent Director.

ChairCreature has Tried to conjure inflation, but credit destruction matches his pace, step for step. It wil shortly overrun him. 

Got FRNs?

BaBaBouy's picture


Right, When In Doubt, RUN To GOLD ...


Finally a bit of sanity out of Europe:

""A CSU document to be released on Monday flatly rebuts the latest accord between Chancellor Merkel and French president Nicholas Sarkozy, saying plans for an "economic government for eurozone states" are unacceptable. It demands treaty changes to let EMU states go bankrupt, and to eject them from the euro altogether for serial abuses.""

Sarko Will prevail though...

spiral_eyes's picture

Merkel will pervail, Europe will collapse, we will have the Great Crash of 2011/12 and a new world order. 

Koffieshop's picture

" you Really suppose the Fed can enforce 2 years at ZIRP?"

They can if they resort to bare-butt fraud.

Paraphrasing: You can keep rates low and even make your debt a source of profit by selling default insurance on your own paper.

This is the most hilarious thing I have seen in a while.

nscholten's picture

The one problem with mining gold is that it is a hard fucking busines.  And just because gold goes up doesn't mean miners will, some of course. but who needs to decided weather a company is running well or not or they don't get run over buy the local government, which they probably should, as it is their gold in the first place.

Arius's picture

right on!  "Their gold in the first place" ... did you just figured it out or is this the latest desperation cry out of the "naked shorts"?

Melin's picture

"...but who needs to decided weather a company is running well or not or they don't get run over buy the local government, which they probably should, as it is their gold in the first place." (?)

The individual(s) willing to risk their money in the purchase of a company's stock decides whether a company is running well enough to take the risk and neither gold nor property should lie in the hands of government.  Liberty requires laissez-faire Capitalism. Government's purpose is protecting your rights not "investing" in assets and "running" economies. 

Every convo in the legacy media about the economies of the West is rotted to the core by unchecked premises that steer the dialogue forever in the statist direction.  It's taken as given that government should keep people who would develop natural resources or produce nifty gadgets from profiting too much without direct intervention by government.  The underlying assumption is that producers are inherently immoral in their desire to profit and take "advantage" of those voluntarily offering a value (money) for a value (a good or service produced).  

It's the government intervention that is immoral. We've gotta get these clown policitians out of our economies by re-educating them on laissez-faire. Check their premises.  They think they're doing the right thing which makes them all the more dangerous.  But it also makes them vulnerable to attack on moral grounds since their entire statist edifice is built on theft and a pretense that government intervention is altruistic and, therefore, moral.  Nothing could be further from reality.

disabledvet's picture

rrrroowww. you look and sound hotter than ever Baby. (can I call you Baby, Baby?) i know i'm 4000 miles away but i bought the best binoculars money could buy--just for you!

chump666's picture

an excellent post. 


Ahmeexnal's picture

Why arent the french sheeple aware that their "money" deposited at SocGen simply....ISN'T THERE?

It's time a "WITHDRAW YOUR MONEY FROM SOCIETE GENERALE" Facebook group goes viral in order to protect french civilians.

spekulatn's picture

Lastly, we are confident that uncle Warren is currently taking a bath with an atlas of Europe, feverishly trying to come up with his latest Eureka moment.


Well done, TD.

The Grifter's picture

The typical Frenchman doesn't worry about it.    Ce n'est pas important.



SumSUN's picture

Ca ne me derange pas.  Celui que j'ai mon bread and cirucus bitchez.

Western's picture

INB4 teh bull cavalry.

stoxster's picture

Are the ratings companies hands tied or what? If the French don't get a downgrade, US should get back their AAA ratings

Yen Cross's picture

 Before anyone posts. Open the charts, they are tricky. Divergence.

nscholten's picture

Fuck your charts.  This ain't chart land

Jasper M's picture

More importantly, in the word's of Eddie Murphy's  character in "Best Defense – 

"What the Hell is a "WAM" ?! "

Hansel's picture

Weighted Average Maturity

Lazlo Toth's picture

"WAMF" would have been something from RAW.

Caviar Emptor's picture

Soc Gen (and several other major banks throughout Euroland) were lynchpins of the covert, trans Atlantic pyramiding of derivative instruments that kept Wall Streeters and banksters in their Berlutis. There were many players. But that ended up creating the systemic risk that took the system down in 08 and which is still is very alive today, hungry for more. They created the illusion of business by trading back and forth with one another, using various tricks to hide the growing monster which eventually caught up with them. Kerviel may have been the fall guy, but there's lots to hide. So much so that the trillions printed and doled out since 2008 were no where near enough. So more 'socialization of losses' is needed, but the natives are getitng mighty restless. 

disabledvet's picture

I absolutely agree. I've been shocked with the violence with which treasuries have called bullshit on the whole thing. Did not see that coming and quite frankly worries me personally. The markets' are moving higher but the name of the game is simple: preservation of capital plain and simple. As Morgan did to the railroads so government will do to the banks. The monied classes have made a collossal blunder if they're not playing ball with the Administration and Congress. Say what you will about Obama and the Republicrats but these guy's are winners on the battlefield--obviously sans heroes of course which goes a long way towards explaining the poll numbers in my view. If they decide to start "killing the killers" however--and he is President of the United States and they are Congress and this is at the time of our most bad-ass..edness(sp?)--you could see a to put this?..."meeting of the minds" among the "political animal classes." Political speculation of course. The exact opposite of what The Bernank said is the problem I might add.

Missiondweller's picture

Its like a slow set up for another Fall disaster. September & October storms are coming.

Caviar Emptor's picture

There's lots more interconnectedness than meets the eye. And the Ponzi of Ponzis is wounded but still alive. The urgency to do more bail outs is growing. 

Drag Racer's picture

International Monetary Research says "Eurozone Break-Up Certain"; I say Embrace the Fact "Banks Cannot Be Saved"

PhattyBuoy's picture

TD smells something rotten emanating from the calm surface waters of Warren's bathtub ...

PhattyBuoy's picture

Ambrose Evans-Pritchard: Euro bailout in doubt as 'hysteria' sweeps Germany.

Coldfire's picture

"Hysteria" was the pejorative bomb thrown at critics of the European Financial Slush Fund ("EFSF") by (Santa) Klaus Regling, the EFSF head. Extraconstitutional abortion EFSF is the €440 billion slush fund that is supposed to patch the €2,000+ billion hole in PIIGS sovereign balance sheets. German lawmakers are set to vote on the EFSF's ratification (because it's already operating, d'oh!) on September 23. So accordingly to Regling, anyone not supporting the ratification whitewash is "hysterical". He is obviously someone soberly confident of his position. As AEP correctly notes, the next month is do or die for Angela Merkel, Germany's destiny and the Euro. Germany can only survive as a country by killing the Euro. The stakes could hardly get any more dramatic.

JLee2027's picture

Uncle Warren in the bath! LMAO

chump666's picture

EUR is up over a full cent, breaking the Aug 9th high (when markets crashed).  Thats a major risk averse signal, lunatics are buying into this.

chump666's picture

as in HFT's panic buying. 

macholatte's picture

USD/CHF just came off .815   EUR/CHF just came off 1.185

Charts look like a profile of the Empire State building

Mauibrad's picture

You've been busy reading this weekend, Tyler.  Nicely pieced together.   Stayed in from the storm?

props2009's picture

Gold weekly and daily charts are screaming

Premium access:


Free access charts:

bakken's picture

When the freeze happens it will be as fast as lightning, BOOM>LockUp!   But, nothing happens till "vacances" finishes in August!  The French won't be cuttting short vacations, for anything.

Sambo's picture

The beginning of the z end....

Breaking news: German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe’s revamped rescue machinery, threatening a consitutional crisis in Germany and a fresh eruption of the euro debt saga.

PY-129-20's picture

She may not have enough votes in her own party and her CSU (Bavarian conservative party; think of Texas with fewer guns and more beer XD) and FDP allies, but the opposition of SPD (Left) and Gruene (Greens) will vote in favour of any further bailout programmes. Only the Linke (radical left, former GDR communist party SED and those that left SPD) will probably vote against another bailout. That's the irony. As a voter you do not have a chance against these bailout packages - you can only vote for another right wing party - and they will be crushed before anything happens, because of our pasts and the constant lecturing of that.

When von der Leyen (CDU) said she wanted the United States of Europe, she got applause by some of her party members, SPD and Greens. What a farce. I mean - I am not against such an idea at all. But for Christ sake - it is not their decision, it is the decision of the German people, the souvereign of our beautiful nation. If the majority of Germans is for such a merge - well, let it be. I am a democrat (not the party) and I wish we would respect our constitution more.

Do I think a United States of Europe would work? No. Not with the current EU model.

Coldfire's picture

I would love to hear Albert Edwards views on SocGen. About a year ago he was very (and correctly as it turns out) bearish on the US stock market and economy, calling for a double-dip recession when ISM went < 50 with S&P heading to a nadir of 450. Wonder if Edwards ate his own cooking vis-a-vis French banks (which just perhaps might be influenced by crashing US equities). SocGen was an absolute genius on the long ramp up of the OTC derivative pyramid. But that which can't continue, won't, évidemment. As Yogi Berra might have said, hindsight is 50-50.

disabledvet's picture

The financial "phony war" has ended.

The Axe's picture

Greek rally bitches....short generators..long greek banks  ha ha  until lunch anyway


Volaille de Bresse's picture

Tyler sssssssssssssssshhhhhhhhh.... You're going to wake my fellow French citizens up!


They watch TV and they read the lying mainstream press so THEY KNOW everything's fine down here. 


Fred Oudéa (SG's CEO) just told us : it's alright! It's alright! (for him and his family I guess...)

PY-129-20's picture

Belle France. One has to admire the spirit of your countrymen. At least they are not as apathetic as my countrymen (German).


ramirez's picture

Soon Société Générale go kaboom, so we should be relaxing by then :)

magpie's picture


PIIGS in flight to safety, but House of BRICS no safer:

Chinese credit rating agency Dagong Global on Monday downgraded the credit rating outlook for South Africa from stable to negative.