Fitch: Bank subsidiary self-funding trend likely to continue

Sept 11: The trend among European banks to make their subsidiaries self-funding is likely to continue, Fitch Ratings says. Potential banking union with a single regulator for all eurozone banks may, over time, make the argument for reducing cross-border funding less compelling within the eurozone. However, the drive by regulators towards less complex business models - and even ringfencing of various operations - would suggest an ongoing trend for self-funded entities, at least at this stage.

Fearing contagion risk, or at least market perception or investor concerns of contagion risk, European banks have been making their foreign subsidiaries more self-sufficient in terms of funding and capital - especially during the past year - in order to limit the potential impact on a parent if a subsidiary gets into trouble.

This trend accelerated with the launch of the European Central Bank’s three-year long-term refinancing operations (LTROs), which some banks employed to partially replace intra-group funding for subsidiaries in peripheral eurozone nations. In a few cases, subsidiary banks have been reducing exposure to overseas parent banks located in troubled eurozone countries - for the same reasons.

In any case, banking union would only affect the drive for self-funding within the eurozone. A similar subsidiarisation trend has been seen across central, eastern and south-eastern Europe (CESEE) and from the UK into the eurozone, so would be likely to continue at least for CESEE countries that do not use the euro.

Finally, the contagion-mitigation argument for self-funded business operations within banking groups works both ways: cross-border funding of subsidiaries not only exposes parents directly to subsidiary bank risks, but also exposes subsidiary banks (and, by extension, local economies) to funding-constraint risks in the event of a parent bank running into difficulties.