As the euro zone's sovereign-debt crisis has pressed banks to lean on short- term options to meet funding needs, analysts have been assessing the risks for banks seeking to raise longer-term debt.
Euro-zone banks need to pay back 1 trillion euros ( $1.32 trillion ) of debt maturing next year, according to Moody's Investors Service . New debt to cover those obligations will come with a higher price tag.
Rising interest rates and investor uncertainty about the health of the region's lenders have kept banks almost completely out of the longer-term bond markets since the summer, leaving them more reliant on shorter-term funds.
While they can still use the cash to profitably lend at longer maturities, " such a funding model is susceptible to break down when the funding markets do not function as expected," noted Deutsche Bank credit strategist Jim Reid .
With wild swings in bond yields becoming the norm, selling new bank debt has been incredibly difficult for months, well ahead of the year-end slowdown. The dearth of new deals is one reason the European Central Bank said last week that it will make unlimited loans available to euro-zone banks at maturities of three years, among other changes, a way of helping to alleviate worries about financial institutions being able to fund themselves in the medium term.
While the ECB's steps have helped to bring down bank borrowing costs slightly, they are still too high, analysts said. Nor have those measures reassured investors enough to make the debt more attractive.
Given the huge amount of bank debt maturing next year, banks have been seeking alternatives such as covered bonds, which are backed by a pool of loan assets, such as residential mortgages or public-sector loans.
They have lower yields than senior debt, which lacks that added security, which makes them less costly for banks.
Investors perceive such bonds to be among the safest type of debt that banks sell, and they have been used in greater volumes by banks. Analysts say they are likely to play an even greater role when issuance resumes in the new year.
In a sign that some banks want to prove they don't need to rely on unsecured debt, Austrian lender Erste Group Bank AG said Friday it can complete all its long-term funding needs for 2012 with covered bonds. The price is certainly attractive. For example, Erste Group's covered bond maturing in June 2016 is yielding about 2.81%, while its senior unsecured bond maturing in April 2016 is yielding 4.601%, according to Tradeweb. Both bonds pay a coupon of 4.25%.
But covered bonds require collateral to back them up, which is in limited supply as banks cut back on lending. Analysts note that the various ECB measures aren't likely to provide any type of long-term stability.
"If you add up all the things that [the central banks have done] in the past weeks, you realize it's a lot," noted Armin Peter , head of covered-bond business and syndicate at UBS.
Yet banks still remain locked out of the market, setting up the usual January boom in bond sales as a major test for the future of bank funding.
