Liquidity and market functioning has declined in euro-denominated securities financings and over-the-counter (OTC) derivatives markets, according to a new report from the European Central Bank (ECB).
The bank reported that results its latest survey on credit terms and conditions in financing and OTC derivatives markets, which found that “less favourable credit terms” are being offered to counterparties, such as hedge funds, throughout these markets. Credit terms are also expected to tighten further in the months ahead, it notes.
The results of the survey are based on responses from a panel of 28 large banks, comprised of 14 euro area banks and 14 banks based outside Europe.
Additionally, the ECB reports that liquidity, and the functioning of markets, has deteriorated for many types of euro-denominated collateral. These same trends have been observed in previous surveys, but the ECB reports that this has accelerated, and is most evident for government bonds, high-yield corporate bonds, high-quality financial corporate bonds, high-quality non-financial corporate bonds and covered bonds.
The report also notes that banks have decreased their market-making activities over the past year and expect further cutbacks in 2016; particularly in government bonds and high-quality corporate bonds. “Compared with previous years, fewer banks characterized their ability to make markets in times of stress as ‘good’, and more banks characterized it as only ‘moderate’,” the report notes. “Results show a strong deterioration in respondents’ ability to act as a market-maker in times of stress, particularly for high-yield corporate bonds.’
The survey found that the use of central counterparties (CCPs) has increased somewhat for securities financing transactions when government bonds, high-quality and high-yield corporate bonds, and covered bonds are used as collateral.
Bank lending survey
A separate survey that looks at euro area bank lending, based on responses from 141 European banks, found that borrowing conditions for businesses have improved, and that standards for housing loans have eased due to competitive pressures.
That survey also found an increase in demand across all loan categories, particularly by businesses. And, it observed that banks’ capital positions have continued to strengthen, and that they have reduced risk-weighted assets (RWAs) in response to regulatory changes.