Moody’s has warned that UK mortgage lenders, especially building societies, face a ‘life-threatening’ fight for retail deposits.
UK banks are facing a considerable funding challenge as the repayment of Special Liquidity Scheme and Credit Guarantee Scheme become due within the next three years.
While the securitisation market is showing signs of life, Moody’s says the average cost of such funding remains high and the prospects of a viable recovery in this market are still uncertain.
It says the continued scarcity of wholesale funds together with the perceived safety of government-owned banks has already increased competition for deposits in the UK, leading to margin compression for a number of lenders that don’t benefit from government ownership or lack the scale necessary to compete.
It cites building societies as the main victims of this distortion, experiencing a net deposit outflow of nearly £8bn in 2009 and forcing them to scale back lending and cut costs.
It says: “Without access to cheaper government-backed funding, many societies will find it increasingly difficult to survive.”
While many of the smaller lenders will have to either consolidate with stronger entities or be at the risk of break up or distressed exchanges.
The ratings agency says that although the government has signalled that it will help lenders set up a series of schedules for capital raisings to ease the pressure from repayments. These measures will face their own set of difficulties as new regulatory requirements regarding quality of capital, especially with respect to building societies, will make the effectiveness of such measures questionable.