According to today’s FT, Spanish Banks are having to turn to the European Central Bank for funding to compensate for the more challenging conditions in wholesale markets. Unlike UK counterparts [Northern Rock aside], they can lodge mortgage backed securities as collateral for their ECB borrowings which other lenders are shunning or imposing high “haircuts” [discount attributed to collateral provided to cover a loan, similar to mortgage sum compared to house value].
This is significant for two reasons. Firstly it places UK banks at a competitive disadvantage to their European rivals since they can use their collateral more effectively – might even given rise to an arbitrage opportunity for European banks of taking in mortgage backed at a high haircut and then lodging it at a lower rate with the ECB. Secondly, it distorts the price in the market by removing some supply that would otherwise have come to market.