Funding requirements suggest banks will considerably increase their take-up of liquidity from the European Central Bank at the end of February when they have another chance to secure three-year cash.
Although some banks have accessed senior bond markets this month - to the tune of 47 billion euros of which around 20 billion euros is senior debt according to Societe Generale - it is a small fraction of the 700 billion euro wall of funding redemptions that the European Banking Association calculates is due this year, mostly in the first half.
After an in-depth analysis into take-up at the ECB's first three-year funding operation in December, Morgan Stanley concludes that banks will take a further 150 billion to 400 billion euros of such funds at the end of February, pushing excess liquidity in the banking sector sharply higher from its current level of over 500 billion euros.
Spanish and Italian banks have taken between 50 and 150 percent of their 2012 funding needs already, Morgan Stanley calculates, which may explain some of the recent strong demand for shorter-dated Spanish government bonds as the cash is parked until needed for redemptions.
"Those banks which didn't do 100 percent in the first (three-year operation) indicate ...they may do this in February and many may go beyond just 2012," the banks' rate and credit strategists said. "This not only materially reduces the risks around funding for these institutions but should in the near term re-assure corporate depositors who have been running down deposits."
The spread of unsecured lending rates over overnight index swap rates, which indicate the level of counterparty risk seen in the future, is seen narrowing through 2012. The so called FRA/OIS spread is around 63 basis points for March, while the December spread is around 43 basis points, according to ICAP data. Reflecting the huge amount of liquidity in the banking system, average current account holdings exceeded the average reserve requirement by as much as 140 billion euros this week, the most since early 2010, according to Reuters data. "I think we will again see a high level of demand (at the next three-year tender)," said Simon Smith, Chief Economist at FxPro.