An increase in covered bond and structured finance issuance volumes will likely be one of the effects of the removal of implicit state-support for large U.K . banks, according to Fitch Ratings.
As part of the U.K.'s banking reforms, the Independent Commission on Banking (ICB) wants banks to put a "ring-fence" around their core retail banking operations.
Regular U.K. retail customers and U.K. small business deposits must sit within the ring-fence while larger corporate deposits and loans from within the European economic area are allowed in the ring-fence. Investment banking and non-European lending are banned.
The creation of ring-fenced and non ring-fenced banks in the U.K. would likely cause ring-fenced banks using structured finance debt to partly fund their assets. It might also result in non-ring-fenced banks using covered bonds and structured finance to lower their borrowing costs, Fitch said.
It is highly likely that a ring-fenced bank will issue structured finance debt in order to fund mortgages or loans that it elects to put in the ring-fenced bank. There will be a regulatory cap on the amount of wholesale debt a ring-fenced bank can issue but it is unlikely to affect origination volumes because banks are free to originate mortgages and loans in either the ring-fenced or non ring-fenced bank, Fitch analysts explained.
"Securitization will continue to play a role in asset financing for ring-fenced banks, but Fitch expects to see the most dramatic change in financing at non ring-fenced banks, with structured finance and covered bonds playing a much larger role," said Ian Linnell, group managing director and Fitch's global head of structured finance and covered bonds in London. "The ICB's proposed rules mean that even when the crisis passes, unsecured bank debt will find it hard to regain widespread support and will account for a lower proportion of a bank's funding than it did before the crisis."
For non ring-fenced banks, there are no proposed limits to wholesale funding and absent potential state support, the use of secured funding could increase.