Spicy Basel

9 September 2011 By George Hay, Margaret Doyle Follow @gfhay

SocGen and BNP are telling investors their funding is secure, despite the pull-back by U.S. money market funds. But tough Basel liquidity requirements would force them to issue stacks of pricier debt, shrinking returns. Unless the rules are relaxed, the banks’ woes will persist.

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Societe Generale and BNP Paribas have issued statements in an attempt to reassure investors that their funding sources are secure. The French lenders were among the euro zone banks to have suffered most from the decision by U.S. money-market funds to limit their exposure to euro zone banks during August.

In a presentation to debt investors posted on its website on Sept. 1, SocGen said that it had issued 93 percent of its 2011 long-term funding programme. It said it had responded to the “August pullback” by the U.S. money-market funds by using euro-dollar swaps in the interbank market. The negative spread on the euro-dollar cross-currency basis swap, which expands when more investors want to borrow euros than dollars, has increased from minus 38 on July 25 to minus 101 on Sept. 9.

The bank also stressed that it issues debt below the level at which its CDS – a measure of the riskiness of its debt – trade. SocGen’s CDS have more than tripled to more than 300 basis points since April.

BNP told investors that it had managed to secure dollar funds from alternative sources, but that this had “cost implications”. BNP said that its share price was “discounting unrealistically pessimistic scenarios.” Its CDS have almost tripled since April too.

SocGen shares are trading around 60 percent below their February high. BNP’s have lost more than 40 percent since their February high.

JPMorgan has estimated that French banks have huge funding shortfalls under the proposed “Basel III” Liquidity Coverage Ratio, which comes into force in 2015 after an observation period. Between them, the two have a gap of more than 100 billion euros, the analysts estimate.

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