Mortgages and annuities

(Sep 20, 2008)

Another week, another giant financial institution comes crashing down.  This time it is the turn of HBOS, a large UK mortgage provider.  The problem was not one of leverage as such, since all banks are highly leveraged.  The problem was one of funding: HBOS's mortgage liabilities were long-term, whereas its funding was short-term.  When HBOS came to renew its short-term funding, nobody was willing to lend.

In an earlier post we showed why the annuities business is also leveraged. However, a crucial distinction between annuities and banking is that the money "borrowed" from the policyholder cannot be recalled at short notice like ordinary loans.  This is one huge appeal of the annuities…

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Tags: leverage, mortgages, annuities

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