11.6.3.2 Improving the funding structure

An excessive reliance on wholesale funding can be a problem. How to reduce the dependence on wholesale funding? There are essentially three strategies to solve funding problems: i) diversifying the sources of funding, ii) deleveraging the balance sheet, and iii) transfer of the ailing bank to a bank with a good financing position. NB: The third strategy is only applicable in the T-context and S/T/W-context.

With respect to the first strategy, it should be recalled that a bank has several sources of funding and that a bank can improve its funding structure by diversifying the sources of funding. This is usually achieved by increasing the deposit base. Retail deposits are considered a stable source of funding.1

The deposit base can be increased by measures aimed at attracting potential depositors and at retaining current depositors. The decision on First Investment Bank (FIB) – a Bulgarian bank that had faced a liquidity crisis and was aiming at strengthening its funding policy – illustrates these measures. FIB set out a deposit-centred strategy with the aim at regaining the deposits that it had lost. The decision on FIB indicates the measure that FIB planned to undertake: focusing on customer communications and deepening customer relationships, preparing frontline and back-office personnel to minimise operational risk, monitoring closely deposit inflows/outflows, with clear mechanisms for early warning, escalation, and proactive management of customers.2

The deposit base can also be increased by means of an acquisition. This is clearly demonstrated in the OVAG-case. Österreichische Volksbanken-AG (OVAG) was heavily reliant on wholesale funding. One of the Volksbanken of OVAG acquired Livebank. This gave OVAG access to EUR 470 million of retail funding. The Commission noted positively that the acquisition reduced OVAG’s past reliance on wholesale funding.3 Similarly, the Hungarian FHB acquired Allianz. The Commission concluded that this acquisition contributed to FHB’s long-term viability.4 The acquisition of Allianz led to an increase in retail and commercial deposits. This growth in deposits contributed to diversifying the funding sources of the bank (thereby reducing FHB’s dependence on wholesale funding).5 In total, there are 6 cases in which the Commission noted that the liquidity position of the bank (and thus its viability) was improved by means of an acquisition of another bank.6

The second strategy to reduce the bank’s overreliance on wholesale funding consists of deleveraging the balance sheet. A balance sheet reduction – such as a reduction of the size of the bank’s loan book – will result in a reduction of the funding needs. Consequently, the bank should be better able to satisfy its funding needs by its deposits and it should be less dependent on wholesale funding.

This solution to the funding problem is mentioned in several Commission decisions. For instance, in its decision on Banca Monte dei Paschi di Siena (MPS), the Commission explicitly indicated that the balance sheet reduction envisaged in the restructuring plan would contribute to the reduction of funding needs.7

Another solution to the funding problem is to transfer the ailing bank to another bank with a good financing capacity. This can be illustrated by the case of Kaupthing Bank Luxembourg. This was a subsidiary of the Icelandic banking group Kaupthing Bank. The causes of Kaupthing Bank Luxembourg’s difficulties were inextricably linked to the collapse of its parent company in Iceland and its inability to finance itself as a result. The Commission considered that the sale to a buyer with adequate financing capacity would remedy the bank’s (funding) problems.8

Similarly, in the case of Fortis, the Commission considered that once Fortis Bank would form part of BNP Paribas, Fortis Bank would no longer have any difficulty raising finance.9