Take Off

It has been an eyewateringly happy week for holders of financial institution equity. Bank stocks soared. There are two key reasons for the volte face in sentiment towards the sector. First, and most important, the Basel Committee has greatly watered down the content of Basel III, the latest incarnation of the international accord to regulate prudential capital in the FIG sector. No longer will minority interests be deductions (cue Barclays take-off), no longer will deferred tax credits be ineligible capital (cue Jap banks soaring), and no longer will the net stable funding regimen be implemented as originally planned. The NSFR threatened to require banks in Europe to raise 3 trillion euros before its implementation, which was planned for [tbc]. Removing this vast debt raising pressure from the sector has vastly alleviated its funding needs, and means that there is now a fair prospect of the wall of investor money being mobilised to meet the still hefty refinancing cliff that loom.

The second fillip to the sector, less widely reported, is that covered bonds have been included in banks' eligible 'liquidity buffer', albeit as 'level 2' assets with a 40% concentration cap. Assuming HM Treasury does not - perversely - prosecute its formerly announced position of precluding them, this is a major boost to the banks ability to raise secured funds in the covered bond mart by cementing the position of the bank buying base. Covered bonds will be a big feature of the issuance landscape in H2.

There remain ominous threats on the horizon, however. The pending debt refinancing needs across the eurozone are still disarming, and the competition from sovereigns seeking funds from the same investor base will be significant. The position of eurozone sovereigns themselves also remains parlous. Even after several years of austerity, the Greek debt load will still exceed 150% of GDP, and the interest burden alone on that debt will exhaust much of the domestic financial resources of Greece. How long will the Greek punters bear the turns of the rackscrews?