Receive free UK banks updates
We’ll ship you a myFT Daily Digest e mail rounding up the most recent UK banks information each morning.
A UK bank serving 14,000 charities has introduced £15mn in fresh debt funding from its proprietor after reporting steep paper losses on the worth of its bond holdings.
CAF Bank stated on Monday it had struck a take care of the Charities Aid Foundation, the UK’s largest charity by revenue, to cowl the shortfall that the lender would face if it had been pressured to promote the bonds and crystallise the losses.
As rates of interest have risen sharply, the worth of bond portfolios has plunged. This hurts lenders which can be notably uncovered to bonds and contributed to the collapse in March of Silicon Valley Bank within the US.
Bonds paying a hard and fast price of three per cent, for instance, are value a lot much less when market rates of interest rise above 5 per cent. Banks don’t undergo losses so long as they’ll maintain on to the bonds till maturity — nonetheless, they’re vulnerable to turning into pressured sellers if too many depositors need their very own funds again.
CAF Bank, an entirely owned subsidiary of the muse, reported final week that the worth of its bond holdings was £33.4mn lower than their ebook worth as of April 30. The paper losses had been equal to nearly three-quarters of its £45.1mn regulatory capital.
The bank’s coverage is to carry its bonds till maturity. It would solely be pressured to understand the loss if it needed to promote the bonds prematurely, which would scale back the bank’s ratio of capital to risk-weighted property under a 14 per cent regulatory minimal.
The fresh funding, along with the bank’s current surplus capital of greater than £20mn, would cowl “the theoretical loss” on the bonds, CAF Bank stated on Monday.
It stated the additional funding had been agreed between the bank’s board and trustees of the Charities Aid Foundation.
The funding can be structured as subordinated debt with a six-year time period however the bank stated the quantity needs to be repaid “much sooner” due to its profitability. Documentation “is being finalised with a view to drawdown immediately after completion”, it added.
“The important fact is that these bonds will always be held until they mature, so the bank will get back everything it invested — an approach endorsed by its independent auditors,” stated Neil Heslop, chief government of the Charities Aid Foundation on Monday.
“As an additional reassurance, the Charities Aid Foundation has agreed additional funding that exceeds this theoretical loss when combined with the bank’s already significant surplus regulatory capital,” he added.
The bank, which holds £1.5bn in deposits and is targeted on serving small and medium-sized charities, reported pre-tax income of £10.6mn for the 12 months to April.
The Prudential Regulation Authority, the lead regulator answerable for overseeing the bank’s monetary power, declined to remark.
CAF Bank had stated on Friday that it was “entirely comfortable that the theoretical mark-to-market position is a technical issue and not a reflection of the capital strength of the bank”.
But Sir John Vickers, who chaired a fee on the UK banking sector after the 2008 monetary disaster, stated: “Losses on bonds or fixed-rate mortgages when interest rates go up are not just ‘paper losses’.”
“Even if the assets are held to maturity, the expected cost of funding that position has risen with interest rates — unless it has been hedged or there are sticky depositors insensitive to interest rates,” stated Vickers, a former chief economist on the Bank of England.
