The news that Westpac Banking Corporation (WBC) has substantially completed its wholesale funding task for the year to September had more market significant than the results of European bank “stress” tests and explains the strong rise in the WBC share price in recent days. Reports suggest that WBC raised its funds for a 5 year term at about 40 basis points lower than prevailing rates at the height of the European debt crisis in May.

So Westpac is comfortable for now. Of course, they will be back again next year to seek another $40 billion of funding. Australian banks generally source 20% of their funding from wholesale funding lines. Westpac, following the St George Bank acquisition, has 25% funding from this source. Our view is that it was the excessive wholesale funding undertaken by St George that led to it falling meekly into the arms of WBC once the GFC started.

As for the European Union, there is a general market disbelief in the credibility of their stress tests, which found that European banks need to raise 3.5 billion Euros of capital, about a tenth of what analysts had projected. Only seven out of 91 European banks failed the test.

Part of the reason why the amount of capital needed was lower than analysts predicted was because the revaluations took into account potential losses only on the government bonds that the banks trade, rather than those they are holding to maturity. This means the tests ignored the majority of banks’ holdings of sovereign debt. In Germany, banks continue to fail to disclose their sovereign debt exposures even though it is well known that they have substantial holdings of PIGS sovereign debt.

Having sailed through their “stress tests,” the European banks now must readdress their long-term funding to finance new lending. Unlike the situation in the US, where corporations are either cashed up or access debt markets directly, a large majority of companies in Europe depend on banks for finance.