The European Banking Authority (EBA) published its annual funding plans report, covering 159 banks that submitted their funding plans for a forecast period from 2023 to 2025. The plans show banks’ intentions to increase market-based funding over the forecast period.
As extraordinary long-term central bank funding matures, banks plan to shift to short-term and long-term debt securities instead. This changing funding composition is particularly relevant in 2023 and 2024 when high amounts of central bank funding mature (TLTRO) and MREL targets become applicable.
The report highlights a sizable increase in banks’ interest margin, with interest rates for loans rising faster than for deposits. Central bank rate hikes and the rise in spreads for market-based funding instruments have contributed to higher funding costs.
Growth expectations for repo to the end of 2023 are at 8.1%, then going flat and slightly down into 2025. From the report: “Funding by repurchase agreements banks enter into may also be of relevance in banks’ strategies in 2023 to substitute extraordinary central bank funding, and they are expected to grow by 8.1% in 2023. The growth of repurchase agreements is expected to slow down in the two years thereafter.”
The report noted that in 2022, holdings of derivatives strongly increased by 22%, reversing a decrease in 2021, whereas repurchase agreements broadly remained at the same level in 2022. Increased derivatives holdings may point to banks’ hedging strategies in a volatile market and interest rate environment in 2022.