Dear Sir (for it is usually a ‘Sir’) – We are a charitable organisation committed to delivering affordable housing to first time buyers and those in housing need. Like your institution we have been in business for some time. Unlike your institution we did not invest in complex and toxic investments called things like “CDO² and “SIVs” (which we thought were for getting rid of the unwanted bits in a kitchen…clearly yours seemed to do the opposite), or pay our Chief Executive £10m in one year.

We have borrowed money from you and have always been careful to keep up with our interest payments. In fact we have such a good record for paying on time the credit rating agencies say we are a better long term credit risk than you are these days. Despite this, matters appear to have been coming to a head in recent weeks and it looks increasingly like you want to weasel out of your side of the bargain.

We were wondering why is that the case, and what, as ‘Relationship’ Bankers, the implications of your proposed cause of action might be.

That nice Mr Peston encouraged me to read the Bank of England’s Financial Stability Report (1), something I don’t often do, but it proved really interesting. According to the Bank of England, the Major UK Banks have maturing wholesale debt of over £600 Billion by the end of 2012. Considering us poor retail savers have only a total of £1Trillion deposited with you, it’s no wonder that you are willing to pay us such a high rate of interest on our deposits all of a sudden. Despite this, it does seem that quite a lot of what you owe to the other banks falls due quite soon!

Speaking of how much you are willing to pay, I couldn’t help notice another of those Bank of England charts (2). That showed that at least one of the big banks (presumably the one that owes the most) was having to pay 2.6% over something called ‘swaps’ (I used to do that with football cards at school, but I’m told you do it with other banks with very large amounts of money) to fund itself for 5 years. Well you very kindly arranged to lend me my money for 25 years at LIBOR + 0.3%. I can’t help feeling you got that the wrong way round, or is that why you now want your money back from us?

I can tell you that we are putting your money to very good use, funding important things. What with the Government suddenly making grant much harder to obtain, we will have to make tough choices too. So we’d really like you to keep your side of the bargain, but you keep on being really pernickety about what we are supposed to do; and you keep on saying that we don’t really have a choice, because there are so few banks around these days. But someone from that nice bunch THFC (The Housing Finance Corporation) came in the other day and told us about the Capital markets and how easy and quick it was to obtain long term funding…

They’ve pointed out that the underlying cost of long term borrowing has only been this low for three short periods in the last twenty years. I am sure you’d agree a bit of certainty seems like a good idea in the next few years!

[Click on the chart above for an enlarged view]

References:
(1) Bank of England Financial Stability Report June 2010 Issue no 27 Chart 4.15: Major UK banks’ maturing funding, Both available in Powerpoint format at: http://www.bankofengland.co.uk/publications/fsr/2010/fsr27.htm#charts

(2) Bank of England Financial Stability Report June 2010 Issue no 27 Chart 4.19 Spread curve for senior debt of the six largest UK banks. Both available in Powerpoint format at: http://www.bankofengland.co.uk/publications/fsr/2010/fsr27.htm#charts

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