Small lenders may be forced to stop offering fixed rate loans

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Smaller building societies and banks may soon have to stop offering fixed rate mortgages as a result of proposed European rules.

As part of the incoming European Market Infrastructure Regulation, all lenders will have to centrally clear derivatives trades – which they use to hedge their interest rate risk – with a clearing member by the first half of 2017, with trades to be reported in a trade depository. The EMIR introduces new requirements to improve transparency and reduce the risks associated with the derivatives market.

However, the Building Societies Association says smaller mutuals and banks are experiencing a problem finding clearing members willing to clear smaller business volumes.

The BSA says smaller building societies tend to do up to 15 trades a year and, as a result, only one clearing member is prepared to deal with them. Even then BSA says the cost has gone up to the extent that it would be uneconomical even if these mutuals clubbed together.

The result would be that up to 12 building societies and many smaller banks would not be able to hedge their interest rate risk and, therefore, would be unable to offer fixed rate mortgages. This would be a blow as up to 90 per cent of lending by mutuals in 2014 was on a fixed rate basis.

A BSA briefing note argues “none of these credit institutions poses a risk to financial stability”.

It adds: “It makes sense for EMIR to include a threshold for smaller credit institutions – smaller building societies and banks – excluding them from the need to clear through a central counterparty.  A similar threshold already in EMIR carves out smaller non-financial counterparties.”

The EMIR is under review by the European Commission and a consultation, to which the BSA has responded, closed earlier this month.

The BSA says: “We’ve…had helpful engagement with Treasury officials, Bank of England and FCA. We’d welcome Government support to achieve this threshold excluding small credit institutions.”