Mortgages and annuities
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 business to bankers: they regard it as a source of cheap,
long-term and stable funding (leaving aside the question
of longevity and other risks).
It is an irony of UK financial services that mortgages are not provided
by insurance companies. In many ways, long-term, fixed-rate mortgages
and annuity portfolios are natural complements to one another.
Perhaps once the dust has settled from the credit crunch we will see
annuity providers offering mortgages?
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