Although it’s hard to say with certainty, given the lack of transactions in the securitisation markets, I believe that the total number of investors is now as low as 35 across Europe, down from the hundreds, if not thousands, pre-crisis.
Gone are the leveraged investors of pre-crisis days – those funds that leveraged their stake by borrowing from banks anywhere between 25 and 100 times their own stake. This doesn’t happen to any degree today and changes to the Basel Capital regime has helped make this less attractive by imposing more stringent capital charges on banks funding such leveraged funds. Despite the fact the EU economy is pretty much the same size as that of the United States, the outstanding stock of both securitisation and asset-backed securities product in the United States is five times larger than Europe. New funding for lending in the UK mortgage and consumer loan markets continues to be provided by retail deposits.
So what impact has Brexit had on all of this? Uncertainty is the watch word. Markets, including banks and investors don’t like uncertainty and there has been plenty of that around. Nevertheless, the immediate market reaction to Brexit was off the scale.
It seems that no one really had allowed for anything other than a ‘Remain’ vote. Panic dumping of anything UK related ensued and, as you will recall, the first week or so was a wild roller coaster. But the swift appointment of Theresa May was positive, regardless of your political leanings, because it curtailed weeks of potential leadership wrangling with no one really in charge of UK PLC.
The Bank of England have played a cool hand also. Mark Carney has had to transition from a pre-Brexit vote position where he said that voting ‘out’ would cause massive problems, which it did, to playing a reassuring role which says that all will be fine and the Bank of England will provide whatever is needed.
The markets have responded well to this without much having been done so far. Having said that I’m sure the Bank will provide support, possibly through reactivation of mechanisms such as the Funding for Lending programmes, Quantitative Easing and of course through interest rate cuts – although realistically with rates today at just 0.5%, how much of a difference a ¼% or 1/2% rate cut will make is not clear to me.
At the moment it is too early to say just what the effects of Brexit will really be on the supply of funding. Lenders will be acutely aware that they need to keep their businesses going and that liquidity is key to survival. Expect to see retail deposit gathering for term periods and perhaps at slightly higher rates to ensure that deposits can be attracted. This will not sit well though with a further rate cut which personally I hope is deferred as of limited value and ultimately counter-productive to maintaining liquidity in the markets which is what is really needed today.