The UK securitisation market is at best flat and it does not look like this situation is going to change for some time. This was one conclusion at the Global ABS conference in Barcelona last month. Although there are exceptions, generally wholesale market trades have come to a near halt, led by uncertainty both in the build up to Brexit and in its aftermath. This has led to a lack of confidence and investors unwilling to invest in mortgage-backed securities due to poor rates of return.
This leaves lenders, either wholly or partly reliant on wholesale funding, in the interesting situation of having to look at alternative funding options and raises the question of where they may look next.
One option is to return to the traditional method of raising funds through deposit taking, and we have seen through the launch of challenger banks that this is a viable option. The main benefit is the ability to pay decent rates to depositors on the basis of lending on products that attract higher margins. This gives advantage to the challengers over some building societies that are generally more restricted on the type of lending they undertake, and that work to tighter margins. With depositors already complaining that rates have continually fallen, even though base rates have remained at the same level, it will be interesting to see how banks and building societies react if the base rate drops.
Alternative funding options may be more avant-garde. The growth in crowd funding is indicative that investors are willing to spread risk for potential return. This could potentially become a funding strategy for existing institutions that, like the general public, are looking at maximising rates of returns on capital. Some of the larger crowd funding players that have scalable infrastructure and operational capability could look at white labelling their services on behalf of mainstream institutions. This could allow these organisations to lend in non-core areas whilst maintaining brand protection.
It is said that ‘necessity is the mother of invention’ and it is clear that Brexit is a trigger that may see the formation of a very different type of market in the months and years to come.