UK Banks Report Higher Senior Debt Share

UK banks reported that senior unsecured debt took a larger share of wholesale issuance this summer while the underlying supply of corporate deposits weakened. Together, the responses raise a question about banks' funding mix, but do not show what senior debt replaced. Bank of England cash data show that UK non-financial businesses placed more money with banks over the survey's three-month period than they withdrew.

A bank that replaces deposits with dearer long-term debt could face a higher cost of funding new credit. But the Bank of England's third-quarter Bank Liabilities Survey does not show that replacement, and its predicted rise in internal funding prices has yet to become an observed rise in lending margins.

What the survey actually measures

In the three months to the end of August, the survey recorded a -10.7 net balance for a change in the supply of deposits from private non-financial corporations (PNFCs) unrelated to the rates or other terms banks offered. The balance for rates paid relative to the cost of other liabilities was +27.1. A separate balance for the proportion of wholesale issuance made up of senior unsecured debt was +48.1, up from +0.2 in the preceding quarter. The balance for long-term rather than short-term wholesale issuance was +15.5. All four figures are in Annex 2 of the survey.

These are not percentage changes in pounds, quoted interest rates or the actual share of debt in banks' funding. Each balance nets lenders' responses, weighted by market share and scaled from -100 to +100. A positive relative-rate balance means that factor supported deposit volumes. It does not measure how many basis points a bank added to its offer. Likewise, +48.1 describes the direction of senior debt's share of wholesale issuance, not its cash value or what it replaced.

Nor does the deposit-supply balance describe total corporate deposit flows. The survey isolates a factor excluding prices and non-price terms. Banks reported positive balances for market-share objectives (+23.6) and funding-structure objectives (+27.1) as contributors to PNFC deposit volumes. That is consistent with competition for deposits while independent depositor supply weakens. It cannot establish a sector-wide deposit loss. Annex 2 does not disclose lender-level responses to show whether a few large banks drove the result.

Deposits and debt did not move as the simple story predicts

The Bank's monthly Money and Credit releases report that UK non-financial businesses deposited £24.4 billion in June, withdrew £9.2 billion in July and deposited £6.6 billion in August. That is a net £21.8 billion inflow. The monthly series covers non-financial businesses in all currencies, while the survey asks about PNFC funding and a specific supply factor. It cannot refute each bank's response, but it rules out presenting the balance as a measured collapse in corporate deposits.

The rate series is similarly restrained. The effective rate on new PNFC time deposits was 3.46% in July and 3.47% in August, with the rate on outstanding sight deposits at 1.97% in both months, according to the August release. A stronger survey balance for relative rates should not be rewritten as evidence that the aggregate deposit rate jumped.

Public debt records show issuance, but no bridge from deposits to debt. Lloyds Banking Group lists two $1.25 billion senior unsecured tranches dated 17 August. Its half-year fixed-income presentation had set out £5.5 billion of completed holding-company senior issuance against guidance of up to £7 billion for 2026. The group cited refinancing maturities and balance-sheet growth as purposes of its wholesale programme. It reported commercial banking deposits up £5.2 billion in the second quarter.

Lloyds is one issuer, not a readout of the survey panel. Its August tranches confirm market access; its programme and growing deposits give no basis to say those bonds replaced lost corporate cash. Coupon rates across currencies and maturities cannot be compared directly with sterling deposit rates to infer a funding premium. The Bank's August capital-issuance release says gross bond issuance by all UK resident sectors fell to £27.3 billion from £44.2 billion in July, with monetary financial institutions among the sectors whose gross issuance fell. This broader series is not a senior bank-debt total.

The loan-price test has not been met

The survey has already offered one useful check on forecasts. In the second quarter, lenders expected the spread on "other" funding relative to reference rates to rise in the next three months, a +14.5 balance. In the third quarter they instead reported -19.7, indicating a fall. They now expect a rise in the fourth quarter, at +20.8. For the marginal internal cost of funding new loans, the second-quarter expectation was -11.1; the third-quarter outcome was +4.0, which the Bank classifies as unchanged. The fourth-quarter expectation is +16.2. These balances appear in Annexes 2 and 4. None is a realised customer loan rate.

Evidence for broad pass-through is thin. The Bank's separate third-quarter Credit Conditions Survey says spreads on loans to small, medium-sized and large businesses were unchanged to August. It expects spreads to stay unchanged for small and medium-sized firms and to narrow for large firms. Its approval-proportion balances were +0.4 for small firms, effectively unchanged, and -8.0 for medium-sized firms, a slight decline. These are lender assessments, not proof of a funding-cost effect.

Actual rates moved in different directions. The August Money and Credit release put the effective rate on new PNFC loans at 5.57%, down five basis points from July, while the rate on new SME loans rose two basis points to 6.63%. Newly drawn mortgage rates rose to 4.60% from 4.45%, and purchase approvals fell to 54,900 from 55,900. Changes in reference rates, credit risk, borrower mix and competition can all affect these readings. The aggregate series does not connect any of them to a lender's senior-debt issue.

The next decisive evidence would pair bank-level deposit movements with senior-debt issuance net of maturities, on comparable dates and currencies, then compare new-loan margins after reference-rate moves. The Bank's September money data are scheduled for 29 October; its next liabilities survey is due on 14 January 2027. Until then, a higher fourth-quarter transfer price remains a forecast, and debt issuance remains compatible with refinancing as well as expansion.