Move to soften capital blow for mutuals gets a mixed reception

11 January 2010 | By Robert Thickett

A report from the Basel Committee on Banking Supervision outlines plans to tone down capital adequacy requirements for building societies and cooperatives.

Building societies have been unhappy about the capital adequacy rules proposed at international and UK levels because they put the society sector at a disadvantage compared with banks.

In a paper issued by the committee on December 17 on the subject of capital adequacy it states that the capital regime should accommodate the needs of non-joint stock companies such as mutuals and co-operatives which are unable to issue common stock.

In terms of the common shares and retained earnings that tier 1 capital must be made up of, there will be flexible entry criteria for common shares to allow mutuals and cooperatives to identify instruments of equivalent quality.

To be included as tier 1 the ins-truments will need to be what is termed loss-absorbent.

But the Building Societies Association is concerned that the starting point with regard to capital from both the UK and the European
authorities’ perspective is entirely based on the plc model.

A spokeswoman for the BSA says: “There should be equal respect for mutual and plc structures, with a decision made on the detail from there. Especially in the UK, the authorities should not try to shoehorn mutuals into a plc model.”

She adds that the BSA stands by its view that permanent interest-bearing shares - fixed interest securities issued by societies and quoted on the stock market - should be counted as core tier 1 capital.

In this week’s Mortgage Strategy The Mutual Crusader argues that at first glance the Basel ruling looks like a step forward. But he questions why mutuals are even on the radar, stating that it is time to put clear blue water between mutuals and banks.

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat