The Bank of England has suggested that certain provisions of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 be implemented to remove the preferential status wholesale lenders achieve when lending to mutuals.
The Bank of England’s financial stability report said: “Wholesale creditors’ incentive to exercise market discipline on management is also diminished because, unlike in banks, they rank above retail depositors in the capital structure. In a number of cases, the incentives created by this capital structure seem to have resulted in societies taking risks without appropriate controls being in place.”
If banks were to have preferential status removed they would be put on an equal par with mutual members in the creditor list, meaning that building societies will either be refused credit or will have to pay more to banks which lend to them to balance the increased risk the bank takes on.
Tony Ward, chief executive of Home Funding, said this could compromise mutuals’ ability to lend to consumers and would be an unintended consequence of a regulatory attempt to tighten up the risk banks take on.
He said: “Subordinating wholesale lenders in this process strikes me as an odd thing to do. If you subordinate banks it will have three consequences as far as I can see: one, banks will look harder at mutuals and their lending strategies before lending to them; two, banks will charge societies a lot more for the loan; and three, banks will simply not lend to mutuals because of the increased risk.”
Ward added that mutuals could find it much harder to compete as an unintended consequence of this strengthening of governance because of the higher cost and increased scarcity of funding from banks.
But Adrian Coles, director general of the Building Societies Association, said the changes were still under discussion and the practical impact on consumers would be negligible.
He said: “Building societies are very aware of the money that needs to be refinanced this year and they’re planning carefully for that. I think there is evidence of that in the personal finance supplements at the moment and mutuals are offering competitive deals to consumers which will provide fixed retail funding.”
He added that there was no confirmation yet on whether this proposed change would actually happen, and that the refinancing issue was not limited to the mutual sector.
He said: “This issue goes beyond building societies and will not significantly affect the mutual sector.”
