Ringfenced retail banks proposed by the Independent Commission on Banking should be subject to similar regulation to building societies to help make them more stable, according to the Building Societies Association.
Speaking to Money Marketing at the Liberal Democrat conference in Birmingham last week, BSA chairman Adrian Coles says the rules would have helped avoid the collapse of Northern Rock which was nationalised in 2008 after the first run on a British bank for a century.
He says: “The regulation would not be exactly the same, for example, building societies must put 75 per cent of their funds into residential mortgages and that would have hit SME lending. But on the other hand, a limit on the amount of wholesale funding for banks like Northern Rock, which took 75 per cent of their funds from the wholesale markets and came a cropper as a result, would be a very positive development.”
The ICB’s final report, released earlier this month, says building society legislation provides a “particularly good basis” for the risk management functions of ringfenced banks, adding that demutualised building societies only got into trouble when those restrictions were lifted. It says the rules could be applied to the ringfence banks “in principle”.
Coles says: “So, the ICB says if ringfenced retail banks were regulated like building societies that would be a favourable development. We would go along with that.”