The superpower of being a bank is less attractive than it has ever been. Three years ago, the treasurer of a non-bank told GlobalCapital that the banking licence he had just applied for was “a licence to print money”.
In a very literal sense this is true; banks are the only institutions that can create money just by extending a loan. But the treasurer was referring to the profitability of the venture.
Lending cash to debt hungry UK households, funded by cheap central bank money and backed by a supportive HM Treasury that wanted more competition in the market was good business.
But last month, the same conversation went in the opposite direction.
The treasurer of a different non-bank shrugged his shoulders and said: “If you don’t need deposits, what is the point?”
For him, the upsides of banking were few — deposit funding (if you can persuade account holders to switch), access to central bank liquidity (in an emergency) and… nothing else.
The downsides, however, include intrusive regulation, pay restrictions, capital constraints and public contempt.
This is the classic “shadow banking” debate writ large.
Non-bank lenders can more or less choose which side of the regulatory perimeter they want to be on, at least in jurisdictions like the UK, where non-banks can originate loans themselves.
If they want to be securitization-funded, private equity-backed shadow banks, that’s fine, but if they want to come into the light, raise public equity and take deposits, then they must jump through a few regulatory hurdles to earn a licence, but it’s perfectly possible — as demonstrated by the string of institutions to gain UK licences since the crisis.
In the shadow of the shadows
Aldermore, OneSavings, Shawbrook and Metro Bank are all post-crisis licensees, followed closely by CivilisedBank, Atom Bank, banks from the supermarkets and spin-offs from Lloyds, RBS and Santander.
But many of the new licensees are relative minnows, and shadow banks look set to dwarf them.
If, as seems likely, private equity firms win some of the UK mortgage books which are up for sale this year, these portfolios will catapult shadow firms up the challenger table.
Whichever institution wins the £13bn Granite portfolio from UK Asset Resolution will acquire a lending book more than five times the size of Shawbrook, more than three times the size of Metro Bank, and more than double that of Aldermore. It will be larger than every building society bar Nationwide, Yorkshire and Coventry.
Part of the issue is regulatory. Senior managers at UK banks are subject to a tough responsibility regimes, and banks have a series of constraints on how they can run their balance sheets.
But more important is the transformation in how banks can raise funds.
In 2012, the Bank of England was pumping term liquidity into the banking system at subsidised rates through the Funding for Lending scheme, with a special 10x multiplier for SME lending. Incumbent banks were concentrating on top quality borrowers, with the marginal (but juicier) parts of the market underserved.
Fast forward three years, and funding is vastly cheaper, warehouse lending is back, securitization exits are back, and the Bank of England’s FLS scheme has slowed to a trickle (£3bn drawn in the first quarter). The Mortgage Market Review has levelled the lending playing field in origination, while the banking levy discourages any lender looking to reach serious size.
Non-banks of other sorts are appearing on the scene. The UK’s platform lending market is still small, but growing fast. Zopa, the biggest platform lender in unsecured consumer lending, is originating about 2% of the total market. But as borrowers get more used to getting credit online, non-banks will find it easier to compete against established institutions with branch networks.
The shift is likely to be permanent. After the post-crisis flood of challengers winning banking licences, it’s hard to see why non-banks would now want to take this route.
Without a special central bank subsidy, who’d want to be a bank any more?