Eurozone banks stressed by anxious governments
Has concern about whether eurozone governments can repay their debts elevated fears about the health of eurozone banks?
You would expect that to happen, given the way that banks both provide financial support to governments and are supported by them (as I discussed yesterday).
To repeat: banks are encouraged by financial regulation to be big investors in government debt or bonds, so are exposed to substantial losses as and when there's a risk of the relevant governments failing to repay all they owe; in extremis, a bank's liabilities are guaranteed by the state, but that guarantee isn't terribly valuable as and when the state itself is perceived to be in danger of going bust.
So with the governments of two big economies, Italy and Spain, finding it harder and more expensive to borrow, it would make sense for there to be evidence of increasing stress in the banking system. Is there evidence of such stress?
Well, data published by the European Central Bank suggests there is.
The indicators show twin related trends: on the one hand, banks are finding it harder to borrow from each other and from financial institutions, and are therefore having to borrow more from the European Central Bank to stay afloat; and the stronger banks are showing a preference for parking their cash at the European Central Bank, rather than lend to the weaker banks.
So, for example, the European Central Bank yesterday provided 247bn euros of seven-day loans to eurozone banks, in what's known as its Main Refinancing Operation - which is the most it has lent in this way since 17 June 2009, when it lent 310bn euros.
In normal, relatively unstressed markets, the ECB would provide between 50bn euros and 150bn euros of week-long loans. So 247bn shows that banks are having difficulties borrowing from normal commercial sources.
That said, stress levels are slightly below red on the alert scale: for seven weeks in the autumn of 2008, at the height of the banking crisis, the ECB provided well over 300bn of this finance.
Or to put it another way, we have not - at this juncture - returned to the dysfunctional market conditions of the world after Lehman.
Then there are the figures for how much banks are lending to the ECB, as opposed to borrowing from it - and these too are elevated.
On Monday, banks deposited 235bn with the central bank, compared with under 50bn that you would expect in normal times.
When a bank decides to park cash with a central bank, it is valuing the certainty of getting its money back above the additional rewards available from lending its cash to other banks: it only gets 0.5% interest from the ECB, compared with at least twice that from lending the money elsewhere.
So it is not a healthy sign when banks want to lend to the ECB.
For what it's worth, however, this indicator of banks' anxiety was worse earlier in November, when they deposited 299bn euros at the central bank.
The final indicator of stress worth examining is the use of the Marginal Lending Facility, which is a way for banks to borrow overnight from the ECB when they're unable to reconcile their borrowing and lending needs at the end of the day.
Again, it is not a good sign if banks can't manage their day-to-day financing needs without a bit of last-minute help from the central bank: it is not good banking practice to live hand-to-mouth in this way.
On Monday, eurozone banks borrowed 2.4bn euros overnight - which may not sound like much, but when markets are calm, use of this overnight facility drops well below 100m euros.
This measure shows that bank stress has been rising pretty significantly from mid September onwards. On 23 October, overnight borrowing peaked at 4.6bn euros.
What does it all mean?
Well, it is moot whether what may eventually force eurozone leaders into bold, evasive action to solve the eurozone crisis is a run on a government, or a run on banks, or some combination of the two.
Update 09:30: Data just released by the ECB shows that on Tuesday eurozone banks deposited 231bn euros with the European Central Bank, a tiny bit less than on Monday but still high. And, also on Tuesday, eurozone banks borrowed 2.6bn euros of overnight money, a little more than on Monday.