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Lenders continue to build retail funding, new report shows


Published: 10 April 2013 | Author: Bernard Clarke

Banks and building societies saw a substantial increase in funding through retail deposits – and a reduction in other sources of funding, including via central banks and wholesale debt and deposits – in the first three months of the year. Overall, however, funding volumes were broadly unchanged over the period, according to the first Bank Liabilities Survey published by the Bank of England.

Although the Bank has long incorporated a quarterly review of liabilities in its Credit Conditions Survey, publication of this new report is the first time it has focused specifically on bank liabilities. Developments in the balance sheets of financial institutions in the UK – and particularly changes in the price, quantity and composition of the funding mix – have assumed a much greater significance because they have obvious implications for the provision of credit to the economy. 

The increase in retail deposits in the first quarter reflected a continuing trend of debt reduction in the retail and consumer sectors. Consumer spending remains low, with customers continuing to prefer retail deposits because they offer a low-risk, but liquid, home for their savings. 

At the same time, lenders have been keen to attract retail deposits and increase their share of the market, reflecting a desire to continue the re-structuring of their balance sheets away from wholesale and into retail funding. However, the net affect has been to reduce the cost of retail funding, with lower rates for savers. The survey estimated that retail funding costs fell by an average of more than 20 basis points during the period.  Lenders expected this trend to continue in the second quarter of the year.

In wholesale markets, lenders reported a number of positive trends. Markets continue to offer attractive, long-dated debt, which is important to firm as they try to match the maturity of assets and liabilities. 

There was also strong demand for UK debt from institutional investors. This demand, combined with limited issuance, resulted in a fall in the cost of wholesale debt for those lenders able to access the markets. Data showed a rise in issuance into private markets – for example, through placements via euro medium-term note programmes. Lenders were also able to raise debt across a variety of markets and currencies, improving diversification for investors, reducing costs and strengthening the profile of liabilities.

Lenders continue to use the markets to raise capital (to absorb losses) and liquidity (to supply loans). Over the period, total capital held by lenders was relatively unchanged. But while the cost of capital – like liquidity – has fallen, demand for it was muted. The balance of firms’ profits, losses, deductions and charges (included fines) has increased the need for capital, but this has been largely offset by a fall in default rates, changes in the riskiness of assets and further contraction in the asset side of the balance sheet. 

Looking ahead, lenders expect improvements in economic conditions to contribute to improving capital positions and perhaps create a need to raise more capital.

Finally, the survey commented on the transfer price mechanism within firms. This is the means by which average individual funding costs are translated into the cost of funding for the business unit as a whole. Unsurprisingly, a fall in the cost of retail and wholesale funding over the quarter has been passed on to business units, with lenders expecting this trend to continue into the second quarter.