UK RMBS investors — brace yourselves
The UK’s RMBS market shrugged off Brexit. Whether it can survive the Bank of England’s new Term Funding Scheme (TFS) is another matter.
The scheme, which could see around £100bn flow from the central bank into the coffers of UK institutions, will slash UK RMBS issuance to its core.
For bank treasury officials, it’s a no-brainer. Why would you structure a securitization and pay a margin upwards of 40bp, plus fees, when the Bank of England is willing to lend you hard cash for four years at just the new 25bp base rate? One UK building society official could barely contain his glee when discussing the new scheme with GlobalCapital.
Market watchers think the scheme could slash UK RMBS issuance by 80% — a similar effect to when the Funding for Lending Scheme was implemented in 2012.
The Bank of England’s intervention with TFS was unavoidable, if it wanted the benefits of its base rate cut to be passed on to consumers rather than being an excuse for banks to protect slim interest margins.
But indirectly, it will be a bad blow for a market that, while hardly flourishing, was showing some signs of life this year.
If issuers decide to neglect the market entirely, it will wither beyond repair. Securitization already faces a disproportionately punitive regulatory regime, a steady outflow of human capital and a fragile investor base that might not stick around until the TFS scheme winds down. The market that remains would be an altogether less healthy funding tool.
Those treasury officials hungrily hooking up to the intravenous drip of central bank funding might want to spare a thought for what could await them in the capital markets when the fun of quantitative easing stops.