Chaos in US short-term funding markets a warning?


Ashley Ilsen

It may have gone slightly under the radar but towards the end of September, we saw the beginnings of what could be the warning signs of a potential crash in the US financial system. Interest rates in the short-term lending space known as ‘the repo market’ shot up to 10%. Estimated to contain $3tn of money changing hands every day, this short-term lending market is an essential supporting part to the American banking system. The significance of these recent events cannot be understated as shortly before the credit crash in 2007, the repo market was one of the first financial sectors to show seriously poor health.

The Federal Reserve reacted quickly to these recent events and injected money into the market, offering to buy up to $75bn in treasuries or other assets from banks in order to provide the liquidity to enable lending. The words ‘bail-out’ weren’t used, and rightfully so, but similarities could be drawn between the actions of the Federal Reserve here and their unprecedented yet essential intervention in 2008.

I find it intriguing that this wasn’t something that was particularly well reported over here. Why should it be when it’s a world away from our small short-term lending space and how we operate? I’m not one to doom-monger. In fact, I think the way we write and talk about our market is essential to consumer confidence in the future and we should be careful not to talk down our market too much. However, the actions of the Federal Reserve were immensely pertinent to our own small space here in the UK.

‘So, what’s this got to do with us?’, I hear you say. Since the last financial crash we have seen a substantial amount of money come into our sector in different forms; banks, private money, institutional funds, crowdfunding and family wealth offices are just some of the types of entities that have helped our market, and the businesses that operate within it, go from strength to strength. We are undoubtedly in much ruder health than when I first joined the industry in 2012. Conversely, we are always going to be subject to the usual rigours of the economy and, in particular, global liquidity markets as well as our own domestic property micro-markets.

There’s an old adage that I detest about when America sneezes Europe catches a cold and, in this instance, if we are seeing the beginnings of a serious liquidity squeeze there could be numerous impending consequences for our market. Primarily this will materially affect the way in which lenders have access to funding lines. If there is a squeeze on liquid capital then we will see the cost of borrowing increase, which in turn could lead to rates increasing for our borrowers. There is the alternative argument that some lenders may continue to lend at less of a margin, or even at a loss, in order to keep their market share. If this proves to be a deeper, systemic problem then the quality of loans written as well as lender practices will also come under scrutiny.

It may take some time for this to trickle down into our market, but it’s now more important than ever for lenders to be well funded, with certainty of funds absolutely key to being able to deliver on a deal. At Magnet Capital we are lucky to has access to a substantial amount of in-house funding which has helped us go from strength to strength in our early days, and it will be interesting to see how our market copes with any upcoming challenges.

Ashley Ilsen, CEO and co-founder, Magnet Capital