Banks in the EU plan to issue more debt instruments in the coming years to make up for an expected decline in central bank funding, according to the annual funding plans report by the European Banking Authority.
The report, published in July, covers 159 banks that submitted their funding plans for a forecast period from 2023 to 2025.
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. By the end of the forecast period in 2025, public sector funding volume is expected to decline to €272bn or 1.3% of banks’ total funding.
This year, lenders plan to increase market-based funding by 5.5%, with a focus on senior unsecured instruments and covered bonds. The issuance volume should substantially exceed the volume of maturing bonds.
Most banks also reported an increase in the cost of market-based funding. On average, the cost of long-term funding in 2022 was reported at 1.97%, 71 basis points higher than the average of 1.26% in 2021. This year, lenders expect costs for market-based funding to increase further. Central bank rate hikes and the rise in spreads for market-based funding instruments have contributed to higher funding costs.
The need to increase external funding also comes on the back of an expected slowdown of deposit growth.
