Bernard Ginns: Bank's securitisation move that heralds first green shoots

It might have called to mind one of those words that George Bush used to invent in his press conferences on the war against terror.

Post financial crisis however and most people with an interest in current affairs are familiar with the banks' practice of bundling up assets, such as mortgages, and selling them on to investors.

This spreading of risk helped oil the global financial machine and ensured a constant flow of cheap credit until summer 2007 when asset-backed bonds started to suffer huge losses because of links to the US subprime real estate crisis.

Earlier this year, the European Central Bank said a revival of asset-backed financing or securitisation was key to European bank funding and to the vitality of the broader economy.

That is why there was such excitement among financial commentators last week when Royal Bank of Scotland announced plans to sell 4.7bn of mortgage-backed securities.

RBS's deal – its first foray into securitisation since the credit crunch – is backed by a pool of new prime residential mortgages originated through RBS and NatWest Homeloans.

The move was watched closely here in Yorkshire.

Julian Wells, marketing director at HML, the Skipton-based financial outsourcing firm, told me: "An improved securitisation market would herald an increased availability of funds for mortgage lending which would enable more activity in the market.

"This would mean more new mortgages being taken out, and potentially more people remortgaging. All of this activity generates work for HML as an outsourced partner to lenders."

HML, a subsidiary of Skipton Building Society, administers mortgages for lenders and expanded rapidly during the years of easy credit, but has been hit by the slowdown in new lending. Neil Warman, the chief commercial and financial officer, said: "We are very close to the securitisation market and we have certainly seen some green shoots of recovery in recent weeks.

"The capital markets have a history of reinventing themselves and there is every sign this is happening at the moment."

That said, he is expecting some marked changes to the dynamics of the market. The problem with the first version of securitisation was that the risk ended up with the taxpayer.

"One thing that is very clear is that the originators – mortgage lenders – will have to retain more of the risk than was previously the case," added Mr Warman.

"This, combined with the increased regulatory focus, will help ensure that mortgage lending, and the subsequent securitisations, will be more robust.

"The other key change is around transparency. The market, and indeed the world, will not accept the 'black box' way of working that has previously characterised this sector.

"All of this should help protect us against a repeat of the disastrous results that have had such a dramatic impact on the Yorkshire, UK and global economies."

STAYING with Skipton Building Society, chief executive David Cutter is backing calls for a Minister for Mutuals to be created in the Coalition Government.

Professor Jonathan Michie of Oxford University said in a report published on Friday that the dominance of the shareholder model, with its relentless need to maximise financial returns, was one of the factors that caused the credit crunch.

A strong mutual sector would help create a more stable and robust financial system, he added.

But Prof Michie said mutuals need a greater market share to put any real competitive pressure on banks and called for a Minister for Mutuals to promote and support the sector at the highest level.

It's an important industry for Yorkshire, employing more than 13,000 people.

Mr Cutter said: "I would support any move that helps the building society sector operate on an even keel with the banks and make sure our voice is heard at the highest level of government.

"Over the last two years the cumulative impact of the response to the financial crisis only reinforces the need for a more robust mutual sector, offering diversity and competition while promoting the traditional values of prudence and enhancing consumer choice."

Kim Rebecchi, a director at Leeds Building Society, added: "We would support any initiative that ensures regulation is proportionate and appropriate for the sector, and that all financial institutions operate on a level playing field."

Tanya Jackson, spokeswoman for Yorkshire Building Society, said: "The consumer focused business model of building societies makes an important contribution to the diversity and strength of the UK's retail financial services sector."

All well and good, but it will be difficult for building societies to gain significant market share while interest rates remain so low.