We review several new surveys and data points that suggest improving market conditions through the rest of Q2 2013.
Following last Thursday’s post, we retain our cautiously optimistic position on the near term future of the securities financing markets. We present below several data points that support our thesis. Although counter-arguments from other surveys can always be found, we’re seeing the glass half full today.
Last week the ECB published their quarterly Euro Area Bank Lending Survey. According to the ECB, “Looking ahead, for the second quarter of 2013 banks expect improvements in funding conditions to moderate further to almost unchanged conditions for most funding segments except for securitisation, where a slight deterioration was indicated. On balance, banks in the euro area continue to expect a marginal net easing in market access to retail funding, money markets and debt securities and a slight deterioration for securitisation. At the same time, the outlook remains mixed across countries and market segments.” The ECB reports moderate expected improvement for very short term and short term money markets.
Likewise, the ECB reported a notable reduction in the impact of Europe’s sovereign debt crisis on bank credit standards: “The moderation was widespread across lending categories and channels of transmission.”
The Federal Reserve’s Senior Credit Officer Opinion Survey on Dealer Financing Terms (a/k/a SCOOS) survey of March 2013 also had hopeful notes. According to the survey, hedge fund leverage was up last quarter” “Most notably, nearly one-half of dealers, on net, reported an increase in risk appetite of their most-favored hedge fund clients, and about one-fourth of respondents, on balance, noted an increase for other hedge funds and insurance companies.” We covered the full results of the survey when they first came out here.
The new era of compliance and acceptance of financial regulations seems to be settling in at US banks and hedge funds. From SAC’s announcement of tighter compliance rules and an active campaign by some banks to meet Basel III capital ratios ahead of schedule, the US financial services industry seems to be gearing up the next round of growing their businesses. We see this as getting back to a new kind of business as usual that encourages strategic planning and investments. Dodd-Frank 165e and some other poorly thought through regulation aside, it appears that most of the worst is behind US financial institutions at this time. The rest, it seems, is largely execution in a new realistic landscape.
Our April 2013 research report, “Bank Funding, Preparations for Basel III and Impacts for Securities Finance,” also found that while the Federal Reserve’s recent stress test of US banks found Stressed Tier 1 common equity ratios to be too low, it also acknowledged that until some sort of uniform risk-weighted assets analysis is possible, these tests don’t really account for much. We think that another massive shock would hurt big US banks at this point, but that doesn’t mean that they wouldn’t survive or violate Basel III capital ratios just overnight. We are also encouraged by the Fed’s Jeremy Stein who is proposing to basically scrap the capital ratios and focus instead on bank liquidity: in a crunch, do banks have enough cash to keep going? (See our post from April 25 for more info.) That’s really the rub, and its good to hear regulators talking about this.
We remain cautiously positive for securities finance markets about the rest of Q2.