Banks will owe £6 trillion by 2015 as debt matures

According to Moody’s, the maturities of banks’ wholesale debt have shortened in recent years, and those banks whose debt maturity profiles have shortened substantially will face huge refinancing needs in the coming years.

The average maturity of new debt issuances rated by Moody’s has fallen over the past five years – globally, average wholesale debt maturities issued by banks fell from 7.2 years to 4.7 years, which Moody’s says is the shortest average maturity for new debt in 30 years.

The ratings agency estimates that rated banks will face maturing debt of about £6 trillion ($10 trillion) between now and the end of 2015 — £4.2 trillion ($7 trillion) of which will come due by the end of 2012.

It warns that the problem will be exacerbated for banks that have been trading off the back of government guarantees. Moody’s says a Baa-rated bank that issued short-term debt under an Aaa-rated government guarantee program has been paying a coupon of approximately 1.3%, whereas it would have to pay approximately 7.75% currently for issuing a 10-year bond on the basis of its own credit standing, a 645 basis point increase.

Moody’s reports that this trend has been particularly pronounced in the US and the UK – in the UK it has gone from 8.2 to 4.3 years, and in the US the average maturity of rated debt has fallen from 7.8 to 3.2 years over the last five years. As a result, Moody’s-rated banks in these two systems will be challenged by more than £1.2 trillion ($2 trillion) of maturing debt between now and the end of 2012.

Moody’s vice president Jean-Francois Tremblay says: “Throughout this crisis, the market has been focused on the asset side of the balance sheet. This analysis focuses on the liabilities,”

“When a bank’s debt profile becomes skewed towards short-term maturities, it becomes vulnerable to a sudden increase in interest rates and/or swings in investor confidence. Such exposure may become increasingly apparent and important as we begin to see the withdrawal of various government support programs worldwide.

“Banks will attempt to reduce the size of their wholesale refinancing needs by shrinking their balance sheet, increasing deposits base or a combination of both.”