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UK banks: over £1 trillion of maturing debt

Earlier this week Adrian Coles, Director-General of the Building Societies Association, gave a fascinating presentation to the Financial Services Club Scotland on the state of the UK's Building Societies sector.  

The presentation didn't actually say too much about Building Societies but was more of a reflection of where we are with the mortgage and savings markets in the UK, and a sad story he told.

Rather than writing down Adrian's presentation in full, it's probably easier to share a few hand-picked slides which tell the tale.

First, here's the gross and net UK lending figures for the past decade:

UK Gross Lending 

UK Net Lending 

EEK!!  Net Lending is the lowest it's ever been.

No wonder house sales are so tepid …


But what was really worrying is that Adrian had picked on two of the Bank of England's Financial Stability Report Charts to illustrate that the situation isn't going to get any better.

The first is the maturing funds of UK banks' wholesale liabilities, by instrument and year of maturation:

Bank of England Chart 2.16

This was in the June 2009 chart section of the Bank of England's report, and shows the ballooning debt maturity mountain peaking in 2011.  In other words, banks' stringent lending conditions will probably remain in place until that debt bubble bursts.

Interestingly, this chart was dropped in the December 2009 Financial Stability Report, but is just as well illustrated by Chart 2.19:

Total funding maturing

[CGS and SLS are the Credit Guarantee Scheme and Special Liquidity Scheme introduced by the current government as our equivalent of TARP]

The figures speak for themselves.

UK banks need to cover £1 trillion of maturing debt over the next four years, including the re-securitisation of £250 billion worth of Residential Mortgage-Backed Securities … don't expect another house price boom in Britain for a while.


Note: Adrian's presentation is available in full to all Financial Services Club members


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Peter

    How can an RMBS security be a liability for a bank? RMBS take mortgages off the bank’s balance sheet, which are then effectively bought by the RMBS security investors. Even if the bank holds onto some of the RMBS security, the bank would simply get its money back when the security matures, less any losses, which might have been incurred anyway if they had kept the mortgages on their books in the first place.

  • Chris Skinner

    Hi Peter
    I guess Adrian was making the point that these securities still need to be paid-off or re-securitised, and is concerned of the ability for RMBS to be repackaged at maturity to buyers who may be less reluctant to take them post-crisis than they were pre-crisis.

  • Right, the banks are stretched thin until at least 2012, as are UK public finances until well beyond that. So the UK financial system will struggle to sustain another serious shock – like, say, a big surge in mortgage defaults due to higher unemployment (now highest since 1994, with public sector jobs to go shortly), and/or a run on sovereign debt to which UK banks are exposed directly and/or indirectly…. uh oh:

  • Peter

    Hi Chris,
    RMBS securities are paid off by the pay-down ( or default / closure ) of the underlying mortgages in the deal. They are rarely paid off by maturing, since the maturity date of the securities are set well beyond the maturity dates of the mortgages. They also don’t need to be rolled, since they disappear when they are paid off. Most RMBS will be sold on to external investors, but any held by the bank could be seen as similar economically to the bank keeping the morgages on its books in the first place, albeit with a different risk profile.
    So I still don’t see them as a liability for the bank.

  • Chris Skinner

    I hear where you’re coming from Peter … but if they’re not a bank liability, why does the Bank of England list them as bank ‘wholesale liablities’, I wonder?
    It is because the bank has to re-securitise these bonds during those years. Yes, they have the ‘asset’ of the loan, but not the liquidity to cover their exposure.
    Equally, RMBS are based upon house prices historically. Should house prices drop, the securitisation of an RMBS leaves a further gap that needs to be funded.
    So there is an exposure there.

  • Peter

    I looked at the footnote for RMBS on the graph in the BOE report, ( b ) in the above chart. It says ‘Shows the date at which markets expect the RMBS to be called.’ ( See Chart 2.16, here: http://www.bankofengland.co.uk/publications/fsr/2009/FSR09Jun2.ppt#24 ).
    I think there is some room for debate there, because in the absence of liquidity to re-securitise, the bank may be less likely to call the security. Even if there is a step up in interest payments after the call date, it might be better to pay it if the bank has insufficient funds for the call.
    Also, RMBS are by design issued by independent ‘Special Purpose Vehicles’, without brand guarantee from the originating bank, so if liquidity is not available to call and re-securitise, the SPV could be allowed to default or fail if interest costs increased. There are also built-in loss-taking mechanisms in the majority of deals.
    The question would be, if these deals cannot be re-securitised, will the banks be able to find investors for new deals? Although this market is already effectively closed anyway, since the end of 2007.

  • Chris Skinner

    Good discussion Peter and I think we both agree on the conclusion, e.g. your final comment is where my thoughts would sit too.