TowerGroup Take-Aways

• Funding challenges continue to increase competition for retail deposits across Europe, but the United Kingdom is feeling the impacts most strongly.
• As funding for UK lending shrinks, retaining existing deposits will remain critical to bolster balance sheets; ultimately, the market will see more mergers and acquisitions.
• The focus in continental Europe, where funding problems are less acute, will be on organic growth; maintaining and developing networks to easily access deposits will be critical.
• Foreign direct banks are using their UK beachheads to gain entry to Europe, further increasing competition for retail deposits.
• Offering attractive products to microsegments of consumers supported by superior customer service will become recognized best practice for enabling banks to win and retain customer deposits.
• Retail banks will need to improve and develop their capabilities in account opening, relationship management and customer retention if they are to retain hard-won retail deposits.

Report Coverage

As banks increased their usage of securitization of mortgages in the years leading up to the current credit crisis, asset-liability risk managers were more easily able to manage funding gaps. The role of deposits was still important to boost balance sheets but played a smaller role than previously in overall funding. Instead, banks turned to securitization, taking increased levels of risk on their own balance sheets. Since August 2007, parts of Europe's securitization markets have virtually shut down as a result of the subprime lending crisis in the United States. The banks' loss of confidence in each other's ability to repay loans has affected market liquidity and caused a scramble for retail deposits as they try to maintain and rebuild their capital positions. This TowerGroup Research Note explains why the current scramble for deposits is more than a short-term trend for European banks. It draws on lessons from the UK market, where the current battle for deposits has been most intense, to identify areas where banks need to focus over the longer term in their efforts to attract and retain deposits.