UniCredit seeks wider ECB funding for Italian banks

MILAN/FRANKFURT Wed Nov 16, 2011 12:58pm EST

A Unicredit bank logo is seen in Rome November 15, 2011.  REUTERS/Stefano Rellandini

A Unicredit bank logo is seen in Rome November 15, 2011.

Credit: Reuters/Stefano Rellandini

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MILAN/FRANKFURT (Reuters) - The head of UniCredit (CRDI.MI) has urged the European Central Bank to increase access to ECB borrowing for Italian banks, a source close to the bank said, highlighting funding concerns among the country's lenders.

The bank's CEO Federico Ghizzoni and other European top bankers met ECB officials in Frankfurt but declined to comment on the content of the talks.

"What is important is to restore confidence," Ghizzoni told Reuters after the meeting, adding that policymakers and financial markets both needed to work toward this end.

Earlier, the Corriere della Sera newspaper quoted Ghizzoni as saying he would ask the ECB "to extend the access to ECB liquidity by widening the type of collateral offered". The request would also be on behalf of smaller Italian banks.

Italian banks have increased their reliance on the ECB for cheaper funding since the summer as the euro zone's third biggest economy was sucked ever deeper into the region's debt crisis and its lenders faced sharply higher refinancing costs.

UniCredit's five-year credit default swaps, measuring the cost of insuring its debt, widened by 40 basis points to 575 basis points after news of Ghizzoni's request, on fears that under current liquidity provisions the bank might be under pressure.

The stock, which has shed around 12 percent since the beginning of the week and more than 50 percent since the start of the year, was up 1.6 percent at 0.75 euros by 1555 GMT, having trimmed earlier gains.

Ghizzoni said this week the bank, which holds 40 billion euros of Italian sovereign bonds, had solid liquidity and its geographical reach and strong retail network would help it reduce significantly the need for short-term funding.

FUNDING COSTS RISE

According to the latest Bank of Italy data for the month of October, ECB funding to Italian banks rose to 111.3 billion euros ($150 billion), almost three times the level of borrowing seen in June.

A Bank of Italy official, Franco Passacantando, said Italian banks still had assets worth 100 billion euros they could use as collateral for ECB funding.

UniCredit, the only Italian name in a list of the most important global banks released this month, has not disclosed the size of its refinancing agreements with the ECB.

Bank Intesa Sanpaolo (ISP.MI) said last week that in early November it had 18.5 billion euros in funding deals with the European Central Bank, and Monte dei Paschi di Siena (BMPS.MI) said it had 15-18 billion euros.

Ghizzoni's trip to Frankfurt came two days after Italy's largest bank by assets unveiled a 7.5 billion euro rights issue after booking 9.8 billion euros of writedowns in the third quarter.

The CEO has announced a major shake-up of the bank's businesses to refocus it on retail and corporate operations, shrinking the volatile investment banking unit in the hope of reviving and stabilizing profits.

He also said the bank would turn to issuing covered bonds and increasingly tap retail funding for its refinancing needs. Italian banks have effectively been shut out of the short-term wholesale market because of the sovereign crisis.

Analysts reacted skeptically to the plan, with many describing it as too ambitious in the face of a worsening economic outlook. Several also pointed out that the bank's funding re-mix strategy was costly.

In a sign of growing funding strains on traditional refinancing channels, UniCredit's net negative interbank position at the end of September rose to 67 billion euros, from 44 billion in the previous quarter, said Cheuvreux analyst Silvia Benzi.

"Going forward, this funding mix is barely sustainable, particularly in a context in which regulators are pushing for a more balanced funding structure," she said in a report.

The ECB has changed its collateral rules several times during the financial crisis to allow different types of assets to be used as collateral.

In addition, euro zone member central banks can choose to use Emergency Liquidity Assistance (ELA) to aid cash-strapped banks. The loans are given at the discretion of the national central bank but have to be rubber stamped by the ECB. The collateral banks post when using the facility is typically of a lower average quality than is accepted by the ECB.

Both Ireland and Greece have used the ELA mechanism, which the ECB defines as support given by central banks in "exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions or markets".

(Additional reporting by Paola Arosio and Luca Trogni in Milan, Sakari Suoninen in Frankfurt; Editing by Jodie Ginsberg and Will Waterman)

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Comments (1)
The crisis persists because the banks ignore basic economics. They dump more cash into the banks instead of lending aggressively to small businesses that give the most new jobs. New entrepreneurs and their workers with jobs and paychecks are customers. There is no jobless recovery because a jobless recovery would be a customerless recovery, and that won’t work. For the government bonds; new companies, workers, and employers pay taxes, and the businesses from whom they purchase pay taxes, and the workers in those businesses pay taxes. The banks that lend the money pay taxes. This increases the value of the bonds because investors know that the governments can redeem the bonds, and the yields can be lower because the system becomes more secure. These endless bailouts that show no concerted plan for economic recovery and growth merely destabilize the EU’s economic system because the debt burdens increase with no corresponding plan to improve the economy and generate the taxes that should pay for any bailout. Statements about bailouts should include lending strategies of financial institutions that will ensure profits, taxes, and repayment of bonds and other loans. This is how the Chinese system works because the government can order banks to lend, and they have state-owned and state-private partnerships in which the government not only gains the taxes I have mentioned, they also gain all profits from state-owned businesses and proportional profits from state-private partnerships. Western nations may need to settle for tax revenues at this time, but there will be no recovery and no taxes to pay for bailouts if banks stack most of their cash in vaults.

Nov 16, 2011 1:18pm EST  --  Report as abuse
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