European banks plan to increase their market-based funding by 5.5% this year, with covered bonds and senior unsecured at the forefront as lenders seek to replace central bank funding, according to the European Banking Authority.
That rising funding need – also driven by regulatory requirements – comes as the cost of funding is also projected to rise.
The findings are presented in the EBA’s latest annual funding plans report, which is based on projections made at the end of 2022 from 159 banks, covering more than 80% of the EU/EEA banking sector by total assets.
European lenders’ increased funding needs have been readily apparent in a busy start to the year in the FIG market. In euros alone, banks in the EU or EEA have issued €127bn of covered bonds year-to-date, up from €90.5bn in the same period last year, according to IFR data.
EU/EEA banks' single currency issuance of senior preferred, meanwhile, has risen to €68bn from €31.9bn, while senior non-preferred/holdco senior issuance has risen to €50.7bn from €38.2bn. Their overall US dollar senior issuance has at times this year been constrained by an unaccommodating cross-currency basis swap but has still risen to US$41.7bn year-to-date from US$37.8bn over the same period last year.
The sharp rise in funding issuance and covereds in particular has come as banks have replaced cheap central bank liquidity via programme's such as the European Central Bank's targeted longer-term refinancing operations.
"Opportunities to attain funding at relatively low costs, after extraordinary long-term central bank funding could no longer be attained, and at lower costs than unsecured funding, in particular while market conditions were more volatile, all supported higher issuance volumes of covered bonds," said the EBA report. "Covered bonds moreover benefited from inherent higher security for investors."
Aside from the higher funding needs, the EBA said banks will also increasingly come to the market to comply with minimum requirement for own funds and eligible liabilities (MREL) requirements.
Thanks to those drivers, overall debt issuance is projected to rise by 5.5% in 2023, with secured issuance (including covered bonds and ABS) is expected to rise by 3.6%.
While spreads have tightened over the last two months, the EBA said the cost of that funding for banks is still expected to rise in 2023, continuing the trend of last year. In 2022, banks' average cost of long-term funding was reported as 1.97%, 71bp higher compared to 2021.
Meanwhile, the growth of banks’ deposits is expected to slow to 2.8% in 2023, after a 4.4% growth in 2022.