U.S. banks issue bonds, but government backing is key

By John Parry - Analysis

NEW YORK (Reuters) - U.S. banks' much-vaunted issuance of their own bonds still costs them so dearly that government-backed debt issuance is likely to be banks' bread and butter for months to come.

By and large, banks have emerged from government stress tests looking less vulnerable than before, analysts say. As a result, financial institutions are making much fanfare about their ability to sell debt again to private investors and their push to repay bailout funds in the wake of the global credit crisis.

But it is much cheaper for banks to use the government backing as a prop to sell debt at about 2 percent yields, versus 6 percent or more for their own bonds. The government-backed bank bonds are guaranteed by the Federal Deposit Insurance Corp.

Banks are unlikely to abandon their reliance on cheap government-subsidized borrowing any time soon, analysts say.

"Their short term-stuff is guaranteed by the government; they have a subsidy to die for," so it makes little sense for banks to issue their own non-guaranteed bonds, said Don Coxe, chairman of Coxe Advisors LLC in Chicago, who advises clients of the BMO Financial Group.

Banks have recently issued some of their own bonds as a public declaration of their determination to ultimately gain independence from the government, especially the strict oversight that comes with its guarantee. But this shift may take years, analysts expect.

For now, banks are trying to regain investor trust that was shattered by the fall of Lehman Brothers last year and the entire financial system's brush with death.

Yet bond market moves show any recovery of investor confidence in the banking system is fragile.