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30 March 2010

Ensuring long-term stability for building societies

The Treasury today published a discussion document on options for securing the long-term stability of the building society sector.

The paper seeks views from investors, members, societies and others on options for:

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.”

Notes for editors

  1. In Reforming Financial Markets (2009) the Government commissioned an expert group to discuss the challenges facing building societies. The group explored four issues: pooled funding, shared services, corporate governance and capital. Updates on the work are provided in Pre-budget Report 2009 and Budget 2010. As a result of the work of the experts group, this discussion paper has been published to seek the formal views of the sector and other stakeholders.
  2. Recent consolidation in the building society sector includes mergers of the Yorkshire and Chelsea, Coventry and Stroud and Swindon, Skipton and Chesham building societies.
  3. Retained earnings remain the predominant source of Core Tier 1 capital for building societies. However the current economic climate has highlighted the need to investigate options available to building societies to raise high quality capital in times of stress. Profit Participating Deferred Shares were introduced in June 2009 and first used by The West Bromwich Building Society in order to increase their Core Tier 1 capital ratio.

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