EU banks eye debt issuance as central bank funding winds down

The projected increase would not be sufficient to replace TLTROs maturing in 2023, EBA report finds

European Union lenders plan to issue more debt instruments over the next three years to make up for an expected decline in central bank support, according to a report from the European Banking Authority.

The EBA analysis, carried out across 160 banks covering more than 80% of the EU banking sector, highlights plans to increase market-based funding by 12%, reaching €4.2 trillion ($4.97 trillion) in 2023. Senior non-preferred instruments are expected to grow by 31% over the forecast period and regulatory capital instruments by 17%.



The report also found banks’ liabilities from short-term debt securities issued – those with maturity shorter than one year – are expected to increase by 32.7%, from €587.9 billion in 2020 to €780.3 billion in 2023.

Over the same period, long-term unsecured instruments are expected to increase by 12.6%, rising from €1.9 trillion to €2.1 trillion, while repos are forecasted to go up by 12.8%, from €1.3 trillion to €1.4 trillion.

Over the same period, deposits by central banks – constituting the proceeds of refinancing facilities such as the European Central Bank’s (ECB) targeted longer-term refinancing operations – are expected to drop by 70%, with a 55.7% decrease in 2023 alone, when most outstanding TLTRO borrowings are set to mature.

What is it?

The EBA produces an annual survey on banks’ funding plans to assess their sustainability. It includes a ‘backtesting’ section, examining how banks’ predictions in the previous surveys panned out. The 2021 survey includes responses from 160 banks across the EU.

Why it matters

Weaning EU banks off their dependency on public sector sources of funding is a top priority for the bloc’s policy-makers, particularly as the ECB seeks its way out of a decade-long emergency footing. Though they wish banks would go back to tapping markets for funding, the EBA survey shows lenders may still be erring on the side of caution.

For one, the plans detailed to the EBA imply a total debt security issuance of €456 billion by 2023, versus €1.8 trillion of TLTRO borrowings that will mature over the same period. In other words, banks may be yet to formulate a plan on how to roll over most of their TLTRO drawdowns – though the EBA notes they may just opt to use cash reserves to extinguish them.

Secondly, regulators would probably like to see banks lock in more long-term funding that qualifies towards Minimum Required Eligible Liabilities under EU rules. Banks instead say they intend to boost issuance of short-term instruments, which don’t qualify as MREL.

As the EBA report shows, long-term funding liabilities are still expected to grow by the low teens over the next couple of years – but after the heavy blow dealt to MREL issuance by the pandemic, regulators may feel banks should step up their game if they are to meet their 2024 MREL targets.

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