Thus, we noted in our latest Financial Stability Review that many LCBGs from the euro area have returned to a modest profitability in the course of 2009, and that their financial performance has strengthened further in the first quarter of 2010. At the same time, deleveraging has continued, while banks have further reduced their reliance on wholesale funding in favour of an increased share of more stable funding sources, such as retail customer deposits and equity. Notwithstanding this slightly positive note, over the next few years the euro area banking sector will face large funding needs, as most of you are aware of. In particular, the 20 largest euro area banking groups have about EUR 800 billion of long-term debt outstanding that will need to be refinanced between May 2010 and end-2012. This figure represents almost half of their outstanding debt with a maturity of over one year. In addition, the need for banks to issue medium to long-term debt is likely to increase as a result of new regulatory requirements on stable funding ratios that would come into force at the end of 2012.
To make things worse, the “originate-to-repo” transactions that took off when the turmoil started in July 2007 have often little in common with the “originate-to-distribute” assets that  2  BIS Review 84/2010  were marketed before mid-2007. Thus, the “originate-to-repo” securities do not aim at being attractive to investors, but serve a different purpose, namely to generate collateral buffers with the central bank. So, the significantly large volumes of retained issuance are effective indicators of the scale of the continuing dislocation of the ABS market and the vanishing of private markets. However, it should be obvious to everyone that the issuance of ABS only to serve as collateral with central banks cannot be a sustainable strategy for the ABS market. In normal times central bank operations are intrinsically of a short-term nature and of a limited size, and are designed to implement the stance of monetary policy. By contrast, ABS transactions backed by residential and commercial property loans have much longer maturities and must cover a very sizeable market. In other words, in normal times central banks tend to have a very limited involvement in financial intermediation and only private investors have the capacity and the need to offer long-term funding to originators. What are the more recent trends? Some developments in the last few months may be interpreted as showing tentative signs of a recovery as new ABS issues were distributed and placed with private investors .