Spain: Effect of second ECB auction on Spanish banks

Spanish banks increased substantially their share of ECB funding (which stood at 38% before the latest long-term auction), as they could have borrowed around €100bn in this operation. Liquidity worries have declined: 2012 maturities of wholesale market funding are no longer an issue, but funding remains a matter of concern. With this operation, Spanish banks have concentrated their sources of funding and they will have to repay all the liquidity borrowed between December 2014 and February 2015. Possible uses: With this liquidity, banks could decide replacing short term financing by medium term funding, creating liquidity buffers, buying sovereign bonds, buying own debt and/or lending to the real economy. Liquidity funding remains disfunctional: To improve bank funding conditions at the European level it would be key to open the bank bond issuance (preferably the unsecured bond segment), perhaps using guarantees to bond issuance. Reducing even further remuneration at the ECB’s deposit facility or even penalizing banks to store liquidity there would also help. In Spain “forcing” entities to tap the market when they use public guarantees and pushing for a transparent restructuring of the sector, so that investors are well informed and can distinguish between entities, is the route to follow

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