Bank asset sale stand-off threatens European lending

LONDON: A stand-off between cash-strapped European banks and possible buyers of trillions of euros of loans, mortgages and real estate they are trying to off-load is putting pressure on the European Central Bank (ECB) to provide more help.

The impasse is not only putting in peril plans by the banks to cut their funding needs and meet tougher capital demands, it is also crimping their ability to lend to small and medium-sized businesses, the companies expected to drive economic recovery.

Some of the continent's biggest banks, in France, the UK, Germany and Spain, have pledged to sell assets and run off existing loans in a bid to shrink balance sheets by as much as 5 trillion euros over the next three years.

This is in reaction to a sudden and dramatic squeeze on funding since the summer, which saw traditional sources of bank funding dry up completely.

As old debts come due some 1.7 trillion euros is due to roll over in the next three years alone banks need to find cash from other sources to avoid bankruptcy.

Pressure from senior bankers has led the ECB to consider extending the term of loans it offers to the region's banks to two or even three years in an effort to prevent a credit crunch that would choke the bloc's economy, sources familiar with the matter told Reuters earlier this week.

"Banks are feeling pain on both sides of the balance sheet," said Alberto Gallo, head of European credit strategy at RBS. "On the one side you have a funding squeeze, with banks unable to raise cash in the capital markets. At the same time, many of the assets they hold are deteriorating in quality."

The resulting asset sales by banks such as BNP Paribas SA, Societe Generale, Credit Agricole SA and Natixis SA in France have been stepped up since August, senior banking sources said. More recently, they have been joined by Spain's Banco Santander SA and Italy's UniCredit SpA, the sources added.

Loans that have been put up for sale include those made to companies ranging from India's Reliance Industries to Italy's Enel and the State of California in the United States, according to Thomson Reuters LPC data.

However, such sales are piecemeal and require time-consuming bilateral negotiations with potential buyers.

Copyright Reuters, 2011