European banks face a 1.2 trillion-euro ($1.6 trillion) shortfall in funding as regulators implement stricter liquidity rules, according to McKinsey & Co.
That deficit will probably grow by 200 billion euros by 2018 based on estimates for deposits and economic growth, the New York-based consultant said in a study published today. France and Italy face the biggest gaps in the euro area, while the Netherlands and Finland have the largest surpluses, McKinsey said, citing European Central Bank data and its own analysis.
European regulators are strengthening banks by setting minimum levels of so-called stable funding they must hold and limiting the type of financing that qualifies. With lower demand for bank debt and deposit growth slowing, those rules may raise longer-term borrowing costs for the wider economy, McKinsey said.
The European corporate bond market would have to triple from about 900 billion euros to a size comparable to those of the U.S. and U.K. to close the gap, McKinsey said. The region’s economy relies on banks to provide about 60 percent of its 19.7 trillion euros in credit demand, the consultant said.
The funding gaps vary across euro-area countries because of divergent levels of deposits and loans, in part due to individual trends in how Europeans save and the differing business models of banks, according to the study.
The net stable funding ratio, which will be introduced in 2018, is one of two sets of liquidity rules planned under a framework of rules agreed by the Basel Committee on Banking Supervision. The measure requires banks to back long-term lending with funding, such as deposits, that won’t dry up in a crisis. The other set of rules is the liquidity-coverage ratio.
The new rules will “impose additional stresses” unless they are changed, McKinsey said.
The study was completed in February. Markets have since been shaken by the rescue of Cyprus by other euro-area states, which forced losses on some of the country’s bank depositors and bond investors.