How much would my potential mortgage be worth to my bank?

opinions4u

The_Fear wrote: »

Interesting. Can you tell me any more about why this is the case?

My numbers are a very rough guide, so don't take them as accurate.

Taking HBOS as an example. Retail deposits are savings and current account balances from the likes of me and you. Wholesale funding comes from institutional investors such as American pension funds (just one example).

In 2008 HBOS were lending £180 for every £100 of retail deposits. The other £80 coming form wholesale funding.

The wholesale funders got nervous and many pulled the plug. This effectively left HBOS as an insolvent bank unable to trade. The Treasury and a loan from Lloyds TSB plugged the gap and Lloyds TSB took them over 3 months later.

The new Lloyds Banking Group (LTSB and HBOS) has a loan book that lends £140 for every £100 of retail deposits. The other £40 is currently funded by a mix of wholesale funding and European Central Bank funding. Without it the bank would collapse.

So the medium term strategy for any bank like this is to lend £100 for every £100 of retail deposits and not rely on anything else. Otherwise the risk of collapse is unreasonably high (assuming the management have learnt the basic lesson of the Credit Crunch).

They two ways of achieving this are to (1) increase the size of your customer deposits and (2) reduce the amount that customers owe you.

(1) is achieved by attractive savings rates, but the higher the rate you offer the tougher it is to make a profit.

(2) is achieved by tightening the criteria for new lending and making the rates less appealing to customers while existing customers continue to repay their capital.

Slightly simplified,