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Government may relax building society restrictions

The Government says it would consider removing lending and funding restrictions placed on building societies if the sector feels they are too restrictive.

Under the Building Societies Act, building societies must ensure 50 per cent of their funding comes from retail deposits and that at least 75 per cent of their lending must be secured on residential property.

However, in a consultation paper published today, called the future of building societies, the Treasury says while it has no plans to amend the legislation at present, it is open to reconsidering the limits.

The paper says: “Building societies may decide that a natural extension to their business model is serving businesses as well as individuals in their communities, including supporting growth by lending to SMEs. If this was part of the sector’s strategy, then the Government would be supportive of this development and would be open to removing any constraints posed by legislation.”

The Government also plans to amend the Building Societies Act so that prohibitions applied to ring-fenced banks, as proposed by the Independent Commission on Banking, will also be applied to building societies. This means banks and building societies have to comply with the same requirements.

It is also proposing to apply the ICB’s loss-absorbency requirements to building societies in the same way as banks. The ICB recommends that primary loss-absorbing capacity of 17 per cent of risk-weighted assets is appropriate for large ring-fenced institutions, which could consist of common equity tier 1, additional tier 1 and tier 2 capital.

The paper says: “The Government does not believe that building societies should have different loss-absorbency requirements to banks and proposes to include building societies in any of the general loss-absorbency measures that apply to banks of a similar profile.”

Building Societies Association director general Adrian Coles (pictured) says: “I welcome the Government’s renewed focus on providing the right legislative framework to support a thriving building society sector in the UK.  Our sector is diverse and provides services to around 25 million customers, through a model that is very different both in structure and ethos to the plc banks. 

“I would echo the high level principles set out in the paper for building societies to be able to compete fairly, free from inappropriate burdens and maintain our distinctive approach and lower risk business model.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Have the government learnt nothing from the banking crisis after all Bradford & Bingley, Northern Rock and Halifax all went bust because they broke the link between depositors and lenders.

    We need more lenders to lend on the traditional building society model not less, I don’t see any benefit at all in building societies getting involved in SME lending particularly if this destabilises the organisations. After all, one in four start-up businesses go bust in the first year and am not convinced that depositors will be very happy to see the solvency levels of their building society called into question if the lender starts lending to high risk enterprises even with the new solvency rules.

    The government needs to stop trying to play around with legislation to cover up for their ineptitude and inability to get normal banks to lend to small SMEs.

  2. The man’s a fool. Wasn’t it this kind of unsupported lending that got us into trouble in the first place. Or is this admittance that they can’t control the banks and force them to start lending ?

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