FRANKFURT, Feb 18 (Reuters) - Euro zone banks shying away from unsecured lending could create bottlenecks for banks looking to refinance as well as making such financing more expensive, German central bank board member Andreas Dombret said on Tuesday.
Since the financial crisis started six years ago, banks have trusted each other less and moved towards requiring collateral in order to lend to each other.
Dombret, who is in charge of financial stability at the Bundesbank, said that demanding collateral for lending could lead to an increasing amount of assets on banks’ balance sheets getting tied up, which tended to increase expected losses for unsecured investors should a bank fail.
“Consequently, unsecured investors are inclined to demand compensation for their more junior position in the debt hierarchy - in effect driving a bigger wedge between secured and unsecured funding costs,” Dombret said in the text of a speech to be given in Tokyo.
“As a result, some banks may find it more challenging to meet their overall refinancing needs.”
The European Central Bank’s Euro Money Market survey showed in November that the unsecured cash borrowing of large euro zone banks represented in the survey decreased by 44 percent, while total turnover in secured lending and borrowing rose by 17 percent. (Reporting by Sakari Suoninen and Eva Taylor; Editing by Toby Chopra)