FSA Liquidity Rules: How ABS Can HelpThe FSA specifically mentions government bonds as a desirable asset to hold. This no doubt suits this government and its successor.
The problem for banks is that these are the lowest-yielding assets. So in order to make a loan, a bank has to borrow not only enough money to fund the loan, but also borrow some more to buy govt bonds. The downside is of course that the income from the lovely liquid assets is lower than the cost of funding, so the bank loses a spread-which it presumably passes on to its borrowers in the form of higher margins.
The FT estimates that UK banks will have to "increase their holdings of cash and government bonds by £110bn and cut their reliance on short-term funding by 20 per cent in the first year alone".
ABS of course involves the issuance of debt which is as long as the underlying assets, so there is no asset/liability mismatch and no reliance on short-term funding. Expect an increase in issuance once the real cost of the new liquidity rules has become clear to banks.
[ add comment ] | permalink
Calendar
