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Banking

UK building societies face funding challenge

Given that larger financial institutions have become reliant on covered bonds as a source of funding, what does this mean for smaller institutions that might not have covered bond or securitization programmes?

Medium and small financial institutions might struggle to change the funding mix towards covered bonds in the same way that the larger players have done.

In the UK, many of such institutions are building societies; owned by their members as mutual societies. A few of the larger building societies have covered bond or securitization programmes. The Co-operative Bank and Yorkshire Building Society have both programmes in place; Coventry Building Society has a covered bond programme, and Skipton Building Society has a securitization programme.

"Medium-sized building societies have a strong presence and a range of funding tools," says a London-based analyst. "Covered bonds and securitization are essential to the funding process, and building societies that can’t fund through these methods will struggle."

The question of encumbrance levels becomes even more pressing for smaller lenders that are heavily reliant on retail deposits. "While I’m not too worried about encumbrance levels at somewhere such as RBS, if we saw similar levels in some of the medium-sized building societies it would be concerning," says the analyst.

The example of Skipton is the most telling of the problems building societies face. The lender, which was downgraded by Moody’s in October over concerns about the extent of government support likely to be on offer, issued a £1 billion RMBS transaction in March through lead managers JPMorgan and RBS. Of the deal, £600 million was repoed with JPMorgan while £400 million was sold publicly. Skipton’s total asset base as at June 2010 was €14.6 billion, meaning that collateral constraints will likely hinder further issuance in the wholesale markets.



see also:

Covered bonds: Fund-starved banks risk collateral damage

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