A comparative analysis of the US and EU retail banking markets - Wsbi

Funding by retail deposits represent upwards of 80%
of total residential outstanding stock of home loans
in the UK, France, the Netherlands and Italy 310 .
There are a number of possible explanations as to
why deposits continue to be the most common
funding instrument for home loans in Europe:
35%
30%
25%
20%
15%
10%
5%
0%
There are exceptions though. Germany, Denmark and
Sweden all have substantial mortgage bond markets.
And although RMBS activity in Europe is very low,
MBS markets are becoming quite active in the
Netherlands, Spain, Italy, the UK, Ireland and
Belgium (where new issues of MBS represented,
respectively, 21%, 17%, 15%, 14%, 13% and 13%
of new residential mortgage loans in 2003).
The growing popularity of MBS funding in Europe is
possibly due to customers increasingly seeking
alternative and more lucrative ways to invest their
savings. This growing trend can be seen in graph 17,
which also reveals however that the share of new
mortgages financed via mortgage bonds has declined
between 1998 and 2002. The result of these two
opposing trends for that period can also be seen in
the graph, which reveals that the proportion of
mortgage loans financed with retail and wholesale
funds relative to secondary funding has remained
stable (figures for graph 17 can be seen in table AD
in the table annex).
Graph 17: Share of new mortgages financed
in secondary markets in the EU
1996 1997 1998 1999 2000 2001 2002
1. The high savings rate in a majority of European
countries, providing a huge mortgage funding
source.
2. Retail deposits are a cheap source of funding.
3. Deposits are generally not sensitive to bank rating,
so the costs of deposits will not rise during a
downturn. Contrary to this, if a bank, or its
mortgage bonds, are downgraded or traded at
wider spreads, the returns on mortgage lending
can be severely affected if funding is via RMBS
or bonds.
4. Deposit maturities follow quite well changes in
maturities of home loans triggered by rate changes,
falling when prepayment is triggered by a rate fall,
and increasing as rates rise and maturities lengthen.
5. Covered bonds are only available in certain
European countries.
6. Residential mortgage backed securities are very well
developed in some European countries such as
the UK and Spain, but less so in others. Much of
this disparity derives from a lack of market
liquidity and sophistication on the part of lenders
and investors. This, in turn, is often a function of
the high costs of securitisation transactions in
some countries, which has deterred lenders from
entering this market 311 .
Nevertheless, there is an interest in Europe to look at
ways to further develop the use of capital markets to
fund mortgage loans. The European Commission’s
Forum Group on Mortgage Credit 312 , which brought
together a number of mortgage credit experts to
look at ways to improve the integration of European
mortgage markets, have for instance suggested
exploring the possibility of the development of a
‘liquid and dynamic’ pan-European secondary
mortgage market in Europe 313 .
■ Mortgage Bond Funding
■ MBS Funding
■ Total Secondary Market Funding
Source: “The costs and benefits of integration of EU mortgage
markets”, London Economics, August 2005
310 “Risk and funding in European residential mortgages”, Mercer Oliver Wyman, April 2005.
311 Points 3, 4 and 6 from: “Risk and funding in European residential mortgages”, Mercer Oliver Wyman, April 2005.
312 The Forum Group was created by the internal market Directorate General of the European Commission in 2003. The Group included more than twenty experts
from eleven Member States. It was set up to advise the Commission on how to make progress towards a European market for home loans, which would
make it easier for home buyers to save money by choosing mortgage products from lenders anywhere in the EU. National consumers associations, the credit
and insurance sectors, and other stakeholders such as European notaries and chartered surveyors were all represented in the group.
313 See “The integration of the EU mortgage credit markets”, Report by the Forum Group on Mortgage Credit, European Commission, 2004.
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