DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
The Northern Rock crisis has brought the issue of mortgage funding to the fore 2
Mortgage funding via the wholesale markets has become more popular in the UK in recent years 2
Securitization in particular has become much more common because of its benefits to lenders 3
The UK mortgage market has become highly sophisticated because of non-retail funding and securitization 4
Starting the troubles, defaults in the US sub-prime mortgage market led to a disruption of credit markets 4
This, in turn, led to a crisis in liquidity, which Northern Rock suffered from 5
Northern Rock's funding model, as well as other lenders', have now come into question 5
Some UK lenders, mainly specialists, are now particularly exposed to liquidity shortages 6
Lenders in the specialist sectors are going to be impacted to a greater degree than diversified banks 6
Difficulties are being played out, particularly in the sub-prime mortgage market 7
All lenders will nonetheless face higher wholesale funding costs and a slower mortgage market 7
Should the wholesale markets continue to be difficult in the long term, many more lenders will suffer 8
Diversified banks may not be exposed on the funding side, but many are on the investment side 8
However, this type of funding will continue being relied upon as it is a strong model 9
Funding by wholesale markets and securitization has worked successfully for many years 9
Loose US lending standards and securitization's opaque nature is more responsible for the current crisis 9
There is no going back to retail-only funding as a large portion of the mortgage market would disappear 9
The market will be repaired, but safeguards should be put into place so that this situation does not re-occur 10
APPENDIX 12
Supplementary data 12
Definitions 14
Bank of England base rate 14
Buy-to-let mortgage 14
Collateralized debt obligations (CDOs) 14
Mortgage-backed securities (MBS) 15
Non-standard 15
RMBS 15
Sub-prime 15
Methodology 15
Further reading 15
Ask the analyst 15
Datamonitor consulting 15
Disclaimer 16
List of Tables
Table 1: Major UK banks' wholesale funding as a proportion of total funding (%) 12
Table 2: UK major banks' issuance of RMBS (£bn) 12
Table 3: Northern Rock balance sheet growth and liability structure (£bn) 13
Table 4: Major UK banks' customer funding gap (£bn) 14
List of Figures
Figure 1: UK banks have turned increasingly towards wholesale mortgage funding in recent years, 2000-07 2
Figure 2: The UK market for residential mortgage-backed securities has grown substantially in recent years, 1999-2006 4
Figure 3: Northern Rock has been increasingly dependent upon wholesale funding, particularly securitization, June 1998-June 2007 6
Figure 4: Major UK banks and others would face a significant funding shortage were they unable to access funding through securitization and the wholesale markets, 1997-H1 2007 10