MODS will raise capital without hitting mutual status

Building societies have come up with a solution to the sector’s capital-raising problems that does not involve sacrificing their mutual status.

Societies are developing a instrument called Mutual Ordinary Deferred Shares that allows them to recapitalise but is also loss absor-bing.

ODS act like bonds but societies reserve the right not to pay out on them if trading is bad.

They are similar to the Profit Participating Deferred Shares used by West Bromwich Building Society last June. The difference is that MODS count as equity on a mu-tual’s balance sheet rather than converting debt to equity, as was the case with PPDS.

MODS are being developed in response to the capital rules from Europe called the European Capital Requirements Directive.

Last week Moody’s warned UK lenders and mutuals in particular face a life-threatening fight for retail deposits to ensure survival.

It says the scarcity of wholesale funds together with the perceived safety of government-owned banks will lead to increased competition for deposits in the UK.

The Moody’s report says: “With-out access to cheaper govern-ment-backed funding, many societies will find it difficult to survive.”

A spokesman for the Building Societies Association says: “The European Capital Requirements Directive is only in its first draft. We have to start responding to it now, but are awaiting clarification before we can finalise our plans.”

Matthew Bullock, chief execut-ive of Norwich and Peterborough, says: “We will look at MODS but given the way we run our business, we don’t have the foreseeable need for this or any other type of capital at N&P.