Securitisation market may not have reopened, says Bank
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The Bank of England has published its bi-annual Financial Stability Report today which says despite a number of securitisations in the UK, the market may not yet have reopened.
The report says these deals that have been struck included contractual features specifically designed to attract investors and the option to return the securities to the issuer on a specified date, offsetting the risk that the issuer could choose not to redeem the RMBS as investors may expect.
But the report says: “It is not yet clear whether this issuance represents a genuine reopening of the UK RMBS market, raising a question about the appropriate future structure of securitisation in the United Kingdom.”
The report does says however that the financial system has been significantly more stable over the past six months and the number of mortgage products available to UK households has increased by around 40% over the past six months to its highest level since September 2008.
Low risk-free interest rates and reduced uncertainty have led to a rebound in a range of asset prices. Primary issuance in many capital markets has resumed, reducing financing risks for some borrowers.
The Bank says the market rally has boosted bank profits, lowered concerns about potential future losses, and has enabled banks to raise further external capital. Banks have also been able to issue unguaranteed term debt, helping them to reduce their reliance on short-term funding.
At the same time, the Report notes that after such a prolonged period of exuberance earlier in the decade, it is inevitable that some banks around the world have overstretched balance sheets. They will take time to adjust, and in the meantime remain vulnerable to the risk of less rapid than expected economic recovery.
Over time, and consistent with maintaining lending into the real economy, many banks will need to reduce leverage further, extend the maturity of their funding and refinance substantial amounts of funding as official sector support is withdrawn.
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