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Rising cost of wholesale funds threatens lending

The high cost of wholesale funding may force lenders to scale back their lending, with Lloyds Banking Group revealing that it is looking to cut its market share by 3%.

Speaking to analysts last week about its Q1 results, Antonio Horta-Osario, chief executive of Lloyds group, said he aimed to reduce his bank’s share of lending from 28% to 25%.

He is aiming to increase its share of retail deposits from 23% to 25% to align with its share of the mortgage market.

A spokeswoman for Lloyds group says: “The retail deposit market continues to be competitive and the costs of deposits remain high.
“But given that retail deposits remain cheaper than wholesale funding, we see it as sensible to continue to grow our deposits further.”

It says the decrease will come from a mixture of customers coming to the end of their deal and not remortgaging with the bank and a decrease in new lending.

Industry consultant Mehrdad Yousefi says that in isolation Lloyds group’s decision will not have a major impact on the market and other lenders will take up the businesss.

But he says: “Funding in the money markets is high at the moment compared with pre-2007 levels. I would not be surprised if over the next three to five years more lenders in the UK, US and continental Europe make sure their funding is covered by their retail deposits.

“Lenders are being forced to take action because of the cost of raising capital and regulation. If they don’t act the cost of credit would go up for consumers.”

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