The paper seeks views from investors, members, societies and others on options for:
* New, more resilient capital instruments (ranking as Core Tier 1 or Tier 1)
* Modifications to existing capital instruments to make them more resilient in times of stress
* Enhancing the Government’s role in supporting societies to raise capital for stability and growth, including changes to legislation
* Exploring whether capital instruments abroad should be adopted in the UK
While building societies have historically been well capitalised, and the majority of building societies have responded strongly to challenging conditions since the financial crisis, the new regulatory environment and increased market competition has raised a number of areas where reform could improve the resilience of the building society model.
These include improving corporate governance and looking at new funding and capital models.
Financial Services Secretary to the Treasury, Paul Myners said: “Building societies have long been at the heart of financial services in the UK.
"The sector encourages a diverse financial system and offers a strong business model.
"The Government is keen to ensure that this remains the case in the long-term.
“I am confident that the range of options available to building societies will enable them to increase their resilience to stress and give the sector, as a whole, the capacity to grow.
“There is a need to consider whether the current capital instruments available to building societies are sufficient to ensure the long term stability and growth of the sector, as well as exploring the alternative options and what changes would be needed to introduce such instruments.”
Adrian Coles, director-general of the BSA, said: "The BSA is part of the expert group that has been working with Treasury exploring some of the issues surrounding access to capital which is one of the primary challenges that building societies and the mutual sector face in the medium term.
"The BSA welcomes the publication of this discussion paper which is well researched and clearly identifies the current issues around core capital requirements for building societies, specifically the need for a new Tier 1 capital instrument that is compatible with the mutual model.
"The Treasury has also summarised, with great clarity, the need within the mutual sector for a 'mutual' compatible form of capital instrument that qualifies and meets the set of requirements coming out of Europe.
"The Treasury raises some interesting considerations on whether a new form of capital instrument could lead to institutional shareholders becoming entitled to a specific governance role at individual societies (while ensuring that mutual values remain paramount), and how this would change the current mutual business model.
"We will be exploring these issues of principle when responding to the paper.
"We will be putting forward a considered response on the development of a new core tier 1 capital instrument.
"This can only remain 'work in progress' until European legislation is finalised and we can have more certainty that it will not only meet the needs of the mutual model, but will be compliant with European requirements."
