The battle for Europe's retail deposits: TowerGroup research reveals the real story behind European funding

2 September 2008

European banks are locked in a battle for retail deposits according to new research from Carol Wheatcroft, analyst, TowerGroup. Banks have been forced to reexamine where the funds come from that allow them to lend to their customers following the credit crunch and the consequences it had on funding strategies, particularly capital market funding.

The TowerGroup research highlights retail deposits as the funding type that appears most cost effective and easily accessible for banks with an extensive network in place. However, the research also notes that retail deposits will be unable to replace capital market funding and banks will have to find new sources of funds if they are to continue lending on the same scale as prior to the credit crunch.

In the past, retail deposits have been used to boost balance sheets, but their overall role, although important, was supplemented by banks’ ability to securitise loans. However, since the credit crunch hit hard in August 2007, the securitisation markets have virtually ceased.

The report from TowerGroup highlights the scramble for retail deposits to enable banks to support their lending and comply with the Capital Requirements Directive. Competition in the United Kingdom is the highest in Europe because the UK’s banks relied more heavily on securitisation for funding than their European rivals as rising house prices fuelled the demand for mortgages.

Highlights of the research include:

• TowerGroup believes that funding challenges will continue to increase competition for retail deposits across Europe, but the United Kingdom is feeling the impacts the hardest.

• Because funding for UK lending shrinks, existing deposits will remain critical to bolster banks' balance sheets, ultimately the market will see more mergers and acquisitions.

• TowerGroup asserts that foreign direct banks are using their UK beachheads to gain entry to Europe, further increasing competition for retail deposits.

• TowerGroup believes that offering microsegments of the consumer market attractive products supported by superior customer service will become recognised best practice for enabling banks to win and retain customer deposits.

• Retail banks will need to improve and develop their capabilities in account opening, relationship management and customer retention if they are to retain hard-won retail deposits.

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