Last week’s warning from Moody’s about lender consolidation when the Government mortgage support schemes expire has drawn attention to the problem of filling a £319bn funding gap.
The Moody’s report suggests that: “Without access to cheaper Government-backed funding, many societies will find it increasingly difficult to survive,” leading to consolidation as lenders scramble for retail deposits.
With the special liquidity scheme ending in 2012 and the credit guarantee scheme due to expire in 2014, time is running out to prepare the market to fund the enormous gap and Moody’s believes there will be “a lack of viable resources” to do so.
Stroud & Swindon sales and marketing director Linda Will says there will be greater reliance on the retail deposit market.
She says: “We will have societies relying less on wholesale funding, and what wholesale funding there is will be more expensive. There will be a greater reliance on the retail market and because that market is finite, there will be more competition for funds.
“Not only will there be less availability for funds in the first place, there will be a smaller market and pricing will go up.”
’You will end up with mega societies. Finally, there will just be Nationwide’
However, Will adds while smaller societies have relied on deposits in the past anyway, other factors are threatening their existence.
She says: “If you are a small building society you almost certainly have little or no reliance on the wholesale market. You have probably always funded your lending through retail funds.
Rather it is some of the things in the new building society sourcebook, such as liquidity requirements, that are threatening the little guys.”
Email Mortgages chief executive officer Michael White says consolidation is almost certain as societies compete for retail deposits and only the strongest will survive.
He says: “The building societies cannot cope with what they see as the unfair advantage that banks are receiving over them. They feel they will either have to merge to maintain the strength they require to do business, or disappear.
“You will end up with mega societies, until I suppose finally, there will be just Nationwide – an appropriate name as it will just be one big society.”
Home Funding chief executive Tony Ward says the Government should either prolong the scheme or make a concerted effort to boost market securitisation to plug the gap.
He says: “We need some more supportive comments from Government regulators, particularly from the Bank of England, acknowledging the vital importance of securitisation to our markets.”
However, Moody’s report comes after the Council of Mortgage Lenders said earlier this month it is “very unlikely” that lenders will be able to repay Government support within the planned timescales.
“Even with wholesale markets functioning again, it is very unlikely that lenders will be able to repay Government funds in full on the current timetable of the special liquidity scheme and credit-guarantee scheme,” it says.
Will agrees and adds that the wholesale market will not be the same as it was a couple of years ago. She says: “If anyone is thinking, another couple of years and we’ll get back to normal, wake up, guys – this is the new normal.
“There will be less wholesale funding and even if it was available, it is questionable as to whether or not societies would want it.”
The CML suggests that due to the difficulty of filling the funding gap in the timescale, “an extension of the period of Government support will be required”.
First Action Finance head of communications Jonathan Cornell says securitisation will not play a significant role in the market and so while most people would like to see the schemes extended, he feels “there is no chance”.
He says: “It will be a while before securitisation plays a meaningful role in funding so we cannot rely on it at the moment.
“All participants would like to see the schemes extended as we have a vested interest in developing the market but I am sure we would all want to move to become self-sustainable. I think 2014 is a reasonable target to work to.”