The Bankwatch

Tracking the consumer evolution of financial services

Why the economy and the G20 matters for banks

Gillian Tett at FT highlights the seismic shift that has taken place in the securitization market.  This may appear obscure but it directly impacts product design and bank product design.

Collapsed debt market poses dilemma for G20 | Financial Times

So far, few non-bankers have really noticed this collapse, largely because governments have stepped into the breach, papering over the gaping hole. In the US, for example, the Federal Reserve has bought $1,250bn of mortgage-backed securities. In Europe, the Bank of England and ECB have gobbled up mortgage-backed bonds, and other securitised assets, via repo deals. Before 2007, eurozone banks sold more than 95 per cent of their securitised products to private sector investors; now it is under 5 per cent – with the rest going mostly to the ECB.

Relevance to Bankwatch:

Pre crisis, Banks were able to package up mortgage loans into batches and sell them off.  This securitisation brought in new liquidity that allowed banks to make more money on the same dollar by making additional loans.  The pre crisis rules allowed the securitised mortgages to be kept off balance sheet, so the loans from the new liquidity had nominal requirement to increase capital. 

This drive a certain marketing and product design strategy based on maximum volume at any cost.  Broker fees were enormous but banks happily paid to drive more volume in this capital cost free environment.

Fast forward to Gillian’s comments above, and we see the markets have probably factored in the G20 regulation that will require securitized loans to be included in balance sheet calculations and therefore capital requirements as required by Basle.

The new environment is less transactional volume driven and more quality driven. Customers must really be happy and happy enough to purchase more products and services that produce revenue.  They must also be sufficiently satisfied to advocate their bank to friends and relatives.  This suggests a very different model for banks and that’s why the securitisation market matters.

Written by Colin Henderson

June 23, 2010 at 23:42

Posted in Uncategorized

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