Thursday, February 5, 2009
Short-term debt market shrinks in Europe
--not a good news for State Street's conduits --SIVs evaporated compeletely, issuance of arbitrage and hybrid conduits dropped by half, mutl-seller conduits market shrank by 20% By Paul J Davies Published: February 5 2009 00:44 Last updated: February 5 2009 00:44 The European market for the short-term debt used to fund bank conduits has halved in size since its end-of-year peak in December 2006, as these lending and investment vehicles have been dramatically scaled down due to the credit crisis. The volume of asset backed commercial paper outstanding from European conduits was $252.3bn at the end of 2008. This is down by more than one-quarter from $344.3bn at the end of 2007 and almost half the $488.4bn of the previous year, according to a report out on Thursday from Moody’s, the rating agency. Conduits channel cheap funds from money markets into loans and investments. They are supported by liquidity facilities from the banks that manage them but, importantly, in good times attract no capital charges, making them highly profitable. Seizing up of the markets for short-term commercial paper in 2007 was key in the onset of the credit crunch as conduits and off-balance sheet structured investment vehicles became unable to raise funding and had to be taken over by banks, or sell financial assets such as mortgage-backed bonds into falling markets. Both the main kinds of conduit have shrunk dramatically, Moody’s said. The riskiest conduits, known as credit arbitrage and hybrid conduits, are similar to SIVs in that their purpose is to profit from the yield differences between cheap short-term funding and higher-yielding longer-term investments – often complex financial debts. While SIVs have almost entirely disappeared, issuance by arbitrage and hybrid conduits declined by 57.1 per cent and 31.5 per cent, respectively, from December 2007 to December 2008, according to Moody’s. Multi-seller conduits, used to channel cheap short-term funding to multiple borrowers, were more stable businesses, yet have declined in size by 19.2 per cent. Five conduits shut down during the year, all of which were arbitrage or hybrid vehicles, and were run by collapsed German banks IKB and Sachsen, Dutch banks KBC and ABN Amro, and Den Danske of Denmark.