Rome's Palazzo Chigi, the seat of the Italian government, is lit up with the colours of the Italian flag. “All countries are in a comfortable zone, except one: Italy,” said AGI's Outin. — Reuters
ROME: Italian banks have the biggest need among European lenders for liquidity to replace cheap funding from the European Central Bank (ECB) that’s set to expire this year and next, Allianz Global Investors (AGI) says.
Banks in the country have taken up the largest amount of the so-called targeted longer-term refinancing operations (TLTROs), which are ultra-cheap funds designed to spur credit to the economy, relative to their reserves, according to the analysis by Simon Outin, a credit analyst at AGI in Paris.
Greek and Spanish lenders came in second and third, respectively, the analysis showed.
Banks have the possibility to tap the market for funds or access other ECB facilities, and Italian banks have “credible” plans to manage the process, he said at a briefing on Tuesday.
“All countries are in a comfortable zone, except one: Italy,” Outin said.
He compared the level of borrowings under the targeted longer-term refinancing operations with cash held at the ECB “and we see that Italy is pretty reliant on TLTROs, with TLTROs representing more than reserves”.
After years of being awash in ultra-low-cost liquidity, banks are starting to pay more for funding as global monetary policy tightens to fight inflation.
Italian banks were among the biggest borrowers of an ECB lending programme that offered a subsidy to extend credit to the economy if certain conditions were met.
Unlike in the United States, where several smaller banks collapsed earlier this year, all European lenders are subject to the liquidity coverage ratio.
That means they have to hold high-quality liquid assets equivalent to the outflows they would expect over 30 days of stress.
The ECB is focusing on liquidity levels as a priority in its annual review of risks to the sector this year.
“If Italian banks are doing nothing, they would end up at an aggregated level below 100%, so they would breach the liquidity coverage ratio,” said Outin.
The problem is that the collateral the ECB will hand back to banks when the TLTROs expire generally doesn’t count as liquid assets, said Outin.
AGI “had to make a certain number of assumptions, notably on the perimeter of the banking sector”, because it used data from both the European Banking Authority and the ECB, he added.
AGI has spoken with all major Italian banks, and since their treasurers “have a credible plan, there will probably be no problem,” according to Outin.
One option is for the banks to sell senior bonds, which wealthy clients will probably find attractive because they offer more interest than other places to park cash, said Outin.
“Using the other ECB facilities is an interesting point, because would it be a stigma or not?” said Outin.
“How would the market react when they see that Italy is receiving 80% or 90% of the refinancing operations from the ECB? I’ve been very clear with my portfolio managers on this.
“For me, I elected this as a potential volatility risk.” — Bloomberg
