Storm Clouds on the horizon

Thrugelmir

While the focus is concentrated on the BOE rate making decisions.

Markets forces are starting to gather momentum. Which may make any decision by the BOE irrelevant.

The Bank notes that funding costs for banks have risen and wholesale term issuance in public markets has weakened in recent months, reflecting in part the heightened stress in the eurozone area.

As June's Financial Stability Report noted, UK banks have made good progress in meeting their term funding targets for this year. But it is currently more difficult for banks to raise new money through RMBS, covered bonds and other bond instruments. If the deterioration in funding conditions persists, it will become harder for banks to deal with the significant funding challenges still facing them, not least the large amount of term funding, including funding supported by the official sector, that is due to mature before the end of 2012. This would in turn have the potential to adversely affect the future availability and cost of loans to UK households.

http://www.cml.org.uk/cml/publications/marketcommentary

ILW

they made need to start attracting more cash from retail savers.

Generali

Here we go again!

Thrugelmir

ILW wrote: »

they made need to start attracting more cash from retail savers.

CML published a report in Jan 2010 called the "Outlook for Mortgage Funding in the Uk 2010 -2015".

A technical but interesting read.

https://www.cml.org.uk/cml/filegrab/TheoutlookformortgagefundingmarketsintheUKin2010-2015.pdf

Nothing has changed for the better. If anything the outlook has deteriorated somewhat.

ILW

Thrugelmir wrote: »

CML published a report in Jan 2010 called the "Outlook for Mortgage Funding in the Uk 2010 -2015".

A technical but interesting read.

https://www.cml.org.uk/cml/filegrab/TheoutlookformortgagefundingmarketsintheUKin2010-2015.pdf

Nothing has changed for the better. If anything the outlook has deteriorated somewhat.

The link is dead, brief summary may be interesting.

michaels

Is it time to start looking out for queues outside branches again yet? I'm just glad I have now spent all my money...

Loughton_Monkey

ILW wrote: »

The link is dead, brief summary may be interesting.

It probably said:

"Outlook for Mortgage Funding in the Uk 2010 -2015"

Forget it. There ain't one.

Thrugelmir

ILW wrote: »

The link is dead, brief summary may be interesting.

Some highlights.

Mortgage market legacy issues

63.
Legacy issues in the UK mortgage market take several forms:
(a) There is the issue of pre-crisis lending to individuals whose credit standing is now too poor to allow them to qualify for a mortgage in today’s stricter underwriting environment. This may be either because they were already impaired credit borrowers when they took out their
loans, or because they have subsequently seen a deterioration in their credit score or financial status.
There has been quite a lot of attention paid to the difficulties this has created for the affected consumers who are ‘stranded’ on their existing deal. But, given that most impaired credit loans have interest rates linked either to 3 month Libor or Bank rate, most borrowers will have benefitted from large reductions in their monthly payments. Even if they could qualify for a mortgage, it is likely to be more expensive than their existing reversionary rate.
Less attention has been paid to the impact on lenders who now have a cohort of inert customers who are paying interest rates that do not compensate for their risk profile.

(b) Reductions in house prices, coupled with lenders reducing their maximum LTVs, has pushed a significant number of borrowers into a position where they do not have the equity to remortgage. Again, the focus has been on the borrower, but for lenders this has created a cohort of customers with limited ability to remortgage away, who constitute relatively high risks, many of whom are on rates pegged at extremely thin spreads over Bank rate.

(c) The low rate tracker mortgage products offered to borrowers in the pre-crisis period have created a legacy issue of their own. In contrast to the ‘can’t moves’ of (a) and (b) above, these customers could remortgage but have an incentive not to move their loan. These borrowers are unprofitable for the lender, not because of concerns about their credit quality but simply because they are locked into borrowing costs that are often below those of the lenders themselves.

64. From a lender perspective, the above cohorts of borrowers are all unprofitable on a risk adjusted basis, and are likely to exhibit low redemption rates, suggesting the drag they will exert on lender profitability could be drawn out.

Retail Deposits

277.
One reason for the slowdown in this series is that most of the growth in deposits historically has been from credited interest rather than people actually depositing new funds in banks and building societies, and with interest rates coming down the quantum of credited interest has fallen sharply.
278.
If a low interest rate environment persists, as seems likely over the coming years given slowing wage growth and the need for fiscal austerity, the growth of retail deposits will remain subdued.
279.
This suggests that any idea of a return to a mortgage market funded entirely from retail deposits can be dismissed as the portion of mortgage assets that are funded from wholesale or government sources has risen to over £500bn (more than 40%).
280.
Even the prospect of government supported funding totalling c£300bn being replaced by retail funds seems wholly unrealistic. At current rates of growth, it would take 9½ years for deposits to fill the gap without any growth in mortgage debt, illustrating the need for wholesale funding channels to return to health.

OptionARMAGEDDON

Not until the short term support to the banks dissapears it wont change. Even then, its going to take time to sort the balance sheets.

Thrugelmir

OptionARMAGEDDON wrote: »

Not until the short term support to the banks dissapears it wont change.

Banks using the SLS have been refinancing the debt while the wholesale markets have been open for business.

OptionARMAGEDDON

Yep, and sucking up liquidity through refinance.