Banks face heavy loans to affiliate companies

by Gill Montia

Story link: Banks face heavy loans to affiliate companies

The difficulties in the US sub-prime mortgage market has left UK High Street banks with the prospect of having to use substantial funds to support affiliate companies involved in high risk investment.

The crisis has caused a shortage of money in the debt markets and a sharp increase in interest rates.

As a result, HBOS has already had to lend £310 million to Grampian, its credit investment company, which operates in the so-called asset-backed commercial paper conduit market.

Conduits are attractive to banks because they provide a means of financing their mortgage and other loan books, by selling short-term maturity commercial-paper and medium-term bonds.

As such, asset-backed commercial paper conduits (ABCPCs) are crucial in the operation of the UK’s biggest banks.

The market is valued at $1 trillion globally, with just over half the business in Europe.

HBOS’s Grampian is reported to have had about £150 million of securities backed by US sub-prime mortgages and attention is now being turned to Lloyds TSB, which has £12 billion in its conduit, HSBC with £12.5 billion and Fortis, which has £13 billion.

Analysts now expect these banks to also be making large payments in support of their conduits.