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Mutuals link up for co-op covered bond

Collins Stewart has revealed that six building societies are in talks with the firm to set up a co-operative that would issue covered bonds to help ease their mortgage-funding problems.

At the BSA conference, CS executive officer Paul Somers told soc- ieties that, by working together, they could create liquid, profitable assets to help fund lending. He said: “This is a concept of smaller to mid-sized building societies combining their resources to access capital markets because of their resulting scale.”

The financial advisory group says it is working with six mutuals which are considering pooling their mortgage assets into a special purpose vehicle, which would then issue an AAA bond to investors. Collins Stewart said the idea of a co-operative covered bond is commonplace in Europe and the US. Somers added: “Asset managers and investors in London are very interested in this idea because they have not seen this sector in the market.”

Homefunding chief executive Tony Ward says: “Covered bonds are excellent methods of funding for banks and building societies especially. FSA liquidity changes later this year will no doubt change the mix and diversity of an institution’s funding – securitisation and covered bonds must make a return as a result – they will be key in supporting the long-term liquidity requirements of banks and building societies.”

Building society chiefs have conceded that the FSA had fair grounds for criticism of the sector and agree that more intrusive regulation is inevitable.

At the Building Societies Association annual conference in Harrogate last week, the FSA hit out at the risky lending practices of some societies.

Hugh May, reading a speech on behalf of the FSA manager of retail firms division Nick Lock, said: “A number societies did not act sensibly to the onset of the crisis and some saw it as a business growth opportunity.

“We have seen unsustainable margins on prime lending, over-ambitious growth targets, a risk appetite too high or not adequately imposed by the boards. Riskier lending was fundamentally mispriced and there was inadequate inv-estment in risk management.”

Yorkshire chief executive Iain Cornish says: “The FSA is right to insist on the highest standards of risk management and it is right to make sure that we reflect very deeply if we are to take any more risks.

“The defining characteristic of events in autumn 2007 was underestimating the crisis. Clearly, we did not know what was coming towards us at that point and it is at our peril if we say it is now being too alarmist but the key is balance.”

Coventry chairman David Harding said: “I think on balance it is understandable that the FSA has become more intrusive, none of us can ignore what has happened. But it would be a worry for all of us if the regulator began to micro-manage every mutual and every decision.

“The best way for societies to reduce the intrusion is to demonstrate to the FSA that there is no need for intrusion, but the important thing now is to man-up and accept there is a cost.”


Image courtesy of Stuart Miles at

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