You’ve had quite a year – both as chairman of the Building Societies Association and as chief executive of Yorkshire Building Society. But looking back what’s been the biggest challenge, and emphasising the positive, your most rewarding moment?
IC: It’s not been the year I’d anticipated, I must admit, either from the perspective of being chief executive of the Yorkshire or from the perspective of being chairman of the BSA.
From a BSA perspective, there was already quite a big programme of legislation that was going to affect building societies before the Northern Rock issues came to the surface.
JM: The Butterfield Bill which would allow building societies to increase their wholesale funding to 75%?
IC: Yes, the Butterfield Bill. That to some extent has been overtaken by events. The BSA was already working on it but clearly there’s been a lot more to focus on around the events of Northern Rock and all the legislation that has gone on the back of that. It has been especially important to ensure that the societies’ voice is being heard in our dealings with the Financial Services Authority and the Bank of England.
As for the most rewarding moment, what I think has been fascinating is the opportunity to be at the heart of things – to speak at pretty senior levels to different parts of the Tripartite Authority and get a better insight than I probably would have got in the normal environment.
JM: How difficult has it been to get your voice heard?
IC: It has not been at all difficult, to be fair. It took time for them to get up to speed but, to their credit, since then whenever we have asked for an opportunity to talk to different members of the Tripartite Authority they have been more than happy to accommodate us. And indeed they have actively sought our views and our input.
As you’d expect they have been monitoring all financial institutions including building societies and they have established a strong dialogue with the BSA. We have hopefully been useful to them and the other way round. That has been fascinating.
JM: The last time we met was back in December when you were hosting a breakfast on behalf of the BSA to launch a research report on what building societies were doing to help first-time buyers. As I recall, the event was in part overshadowed by the liquidity issue and frustration with the government’s Homebuy initiative.
IC: It was indeed.
JM: And I think you started talking about Northern Rock and contrasted the action or lack of it by the Bank of England compared with the European Central Bank and the Fed?
IC: Yes, at that time both the Fed and the ECB had been much more active in either putting liquidity into the market or accepting wider collateral classes in their regular operations.
The Bank of England seemed to be putting much more weight on the moral hazard point. I have a lot of respect for that but my view at the time was frankly that the world had moved beyond that. Everyone was going to suffer, not just those who had perhaps taken undue amounts of risk.
Things have clearly happened since then and we have welcomed as a sector and as a building society the co-ordinated action that has taken place between all the major central banks at the back end of last year and at the start of this year. This has had a positive impact on market sentiment and did free up markets a little bit.
We’re now seeing some of those pressures building up again and frankly that’s just going to carry on until some of the capital markets start freeing up.
There’s just going to be more and more pressure in the short-term markets. So while the Bank of England made two good interventions, in December and then in January, as far as we are concerned it needs to keep doing that. It needs to keep close to our markets and be willing to step in again.
I can see the difficulty in its position and the reality is that the Bank hasn’t got enough money to step in when the market isn’t working but it can do a lot to manage sentiment. This is the main impact of previous interventions by the central banks – it helps sentiment.
JM: But what is needed to change sentiment and restore confidence?
IC: It’s hard to say. The prevailing wisdom is that we’ll get through the results season and that will change things but I don’t see that now. I think it is going to be the passage of time.
It’s not suddenly going to flick into a different gear. It’s going to take a long time while confidence is restored, while all these losses work their way through the system and, frankly, while everyone adjusts their business models.
Everyone is going to have to revisit their strategy and their operating model to cope with the new environment. I think you will have to question whether some markets will ever re-open.
JM: But hasn’t the off-balance-sheet funding model opened the door to homeownership to a lot more people and contributed to competition in the market?
IC: I agree. But just how far did that process go? I mean, you could argue that US sub-prime lenders opened the door to help a load of people who shouldn’t have been homeowners. I’m not trying to make a parallel between what happened in the US and over here – I’m exaggerating to make a point. But the situation is only sustainable if the housing market itself is sustainable and if the lending is being done on a basis that offers a sustainable return on capital and reflects the risks in respect of different types of lending.
JM: Taking up the issue of sustainable homeowners and returning to that BSA breakfast we talked about earlier, the take-up of the government’s Open Market Homebuy scheme has been very low. That must be a disappointment to your society, which has been a big supporter of Homebuy. But has that disappointment taken a new twist?
I met Andy Caton, your corporate development director, a while ago. He was on his way to Whitehall to talk about Homebuy and Yorkshire’s involvement in the scheme. He wasn’t in a positive mood. Can you reveal the outcome of that meeting and what has happened? IC: It’s fair to say that we’re still talking. It is taking longer than we had hoped. They’re selecting three pro-viders to take the next phase forward and we are not one of those.
JM: That’s astonishing, considering your track record and the support you’ve given the scheme.
IC: Well I suspect that’s why Andy wasn’t feeling positive. That said, we’re still in a dialogue and while the future might not be that particular scheme, it’s not over yet.
Reflecting on the Open Market Homebuy scheme, from our perspective it has been a great success. We took a big share of that market. From the government’s perspective I don’t think it has been a success – well it hasn’t used it as a template for the new scheme which I suppose tells us something about its view.
Again from the society’s point of view, we learnt a bit about dealing with government initiatives and that’s inevitably frustrating. But you have to expect a lot of hoops to go through because a lot of public money is involved.
We certainly found a lot of latent demand. A huge volume of enquiries came from people who subsequently turned out not to be eligible for the scheme but who nonetheless were interested in shared equity products. It was always our intention to look to the Open Market Homebuy scheme to establish a toehold in the market and then look to non-government options.
JM: What, creating new products?
IC: Well there are lots of complications in that – not least the accounting treatment of the equity bit that’s on our balance sheet and the volatility which that can introduce. That would always restrict our appetite.
One of the key requirements for us to open up the shared equity market would be the emergence of a liquid market in house-price derivatives. There’s a market – it’s just not deep or liquid enough to allow us to manage the risk in the same way as we manage the risk with fixed-rate mortgages.
And we were also going to use our covered bonds programme as a funding tool but recent events have delayed that and so has our view on house prices.
We’re a little more bearish about the housing market and now is probably not quite the right time to increase our exposure to house-price risk. However, we remain enthusiastic about shared equity and convinced that it is a viable market. But from our point of view we’re happy to put those plans on the back burner for a while.
JM: Picking up on the use of covered bonds, Yorkshire has been quite innovative with optimising its balance sheet with bonds and wholesale funding but the bulk of your lending is funded from retail savings. When the credit crisis first broke I thought building societies and the rest of the balance sheet lenders could clean up the market but in retrospect that was perhaps too simplistic?
IC: Yes, as a balance sheet lender we are constrained by the amount of retail funding we can raise. Any major lender has a mix of wholesale and retail funding but there’s a finite supply of retail funds. That supply has gone up – there has been a flight to deposit-based savings – but relative to the size of the wholesale market, it’s a tiny fraction.
But we’re also constrained by the price of those funds because all those people who were able to get cheap wholesale money have huge funding programmes that they have got to roll over. If they can’t get it in the wholesale markets they’ll get it in the retailmarkets. So a purely retail-funded lender is still going to be under a lot of pressure, even if it is only in terms of the pricing for those retail savings.
JM: Then shouldn’t the state-owned Northern Rock be downsizing its retail savings offers to create a more level playing field?
IC: I would be very happy with an orderly managing down of that business but anything much short of that is, frankly, almost unacceptable.
It’s out there offering a 6.45% fixed interest bond with instant access, underpinned by a government guarantee – that feels to me like unfair competition. I don’t think we should force anything onto Northern Rock which would cause it to implode but there has to be a managing down of the business. It can’t be taking market share from the savings side and the mortgage side – that’s unacceptable to me.
JM: Moving on to perhaps more sensitive areas, the intermediary arms of some of the building societies are going through interesting times. I’m not asking you to comment on those societies but your own intermediary business, Accord Mortgages, is seeing changes too, with a very high profile one at the top. Is the changing market dictating this, or are there other issues?
IC: Societies that set up subsidiaries also tended to concentrate their non-conforming lending or buy-to-let through them and obviously those are the parts of the market that have been most affected by the funding crisis because funding counterparties have been most nervous about that type of lending.
As I said before, we’re not immune from that. We couldn’t possibly stay in a market where everyone else has pulled out. But we haven’t singled out Accord any more than we have the society. We’ve looked at all our lending. We have slowed down because we don’t want pressure on any of the funding lines, and we’ve taken some of the risk out of it.
But overall, Accord still does an awful lot of prime lending. In fact, the majority of its lending is prime and last year about half of the group’s total lending was through it. It remains a hugely significant part of the group’s plans.
Exactly what proportion of business goes through the society and what proportion goes through Accord, and exactly what risk profile of lending we do through Accord, is under constant review and recalibration.
We won’t take that long-term decision until we have a clearer view of how the economy is going to emerge and a clearer view of what the long-term funding cost is going to be.
We also need a clearer view of the arrears climate and the other point is what is the regulatory response going to be? That’s the big unknown and it’s the big unknown for the intermediary sector as well.
In addition to finding a lot of lenders withdrawing products they’re also finding themselves under huge scrutiny from the FSA. So what happens to the intermediary sector obviously has an impact on the future of our intermediary lending.
JM: I’m intrigued by the fact that your society has never entered the buy-to-let market. Do you think it represents bad business or is it an ethical thing – you know, building societies were started to help people become homeowners, not to fund landlords? IC: Well we don’t do any commercial lending, we don’t do any unsecured lending, we don’t do any buy-to-let and we’ve always focused on residential lending. In fact, we predominantly focus on prime residential lending and predominantly house purchase. And when we’ve gone into non-conforming lending it’s been for credit repair – not the merry-go-round stuff, so we’re probably more drawn towards the traditional roots of building societies.
That said, the decision not to go into buy-to-let is frankly as much about our assessment of risks/return characteristics as it has been about any ethical consideration.
We have always felt that when you lend money to people it is partly on the property but is also partly on the covenant that the borrower gets with buy-to-let. That whole market hasn’t been tested through a major recession and I hope it won’t but the chances of that happening now look slightly greater and I guess we’ll find out whether there is a real distinction between amateur and professional landlords.
Having said all that, we were actually looking at a selective approach to buy-to-let prior to the credit crunch. We’ve just postponed those plans until the situation is clearer.
JM: Your period of office as chairman of the BSA comes to an end at the conclusion of the BSA conference in Manchester on 8 May when some of the speakers, according to the programme, will be indulging in blue-sky thinking. How difficult is it for a chief executive to look ahead and do you have a vision for the future?
IC: It is difficult. The guiding principle for our business is the fact that our members are the main financial stakeholders. Fundamentally, we do see big opportunities for balance sheet lenders like us. But it just doesn’t feel like the time to place a big strategic bet which, if pays off, will pay off very handsomely but if it doesn’t, it could end being very bad news.
The reality driving our business at the moment is being very cautious. We’re building up liquidity, we’re slowing down our lending and taking a lot of risk out of lending, and placing more emphasis on retail funding. Frankly, we won’t be staking the business on my view of the future in case my view is wrong. We really are running in a safety first mode.
JM: And beyond that horizon?
IC: That’s also conditional, with a lot of variables. But I think a much more traditional view of building societies is going to be viable.
JM: Finally, what do you think your legacy will be to John Goodfellow when he takes over as chairman of the BSA next month?
IC: Well I think he’ll be dealing with the issues around the credit crunch and all the related regulatory and market turmoil and I suspect that his successor will be doing exactly the same throughout his term.
Iain Cornish- personal profile
Position: Chief executive, Yorkshire Building Society. Yorkshire is the third largest building society. Of the major societies it is arguably the one that has remained most focused on its residential lending roots, and we aim to be second to none in delivering value, service and innovation to borrowers, intermediaries and savers.
Always want to be a mortgage lender? I cannot say I always wanted to be in the lending industry, but one of my earlier memories is of my father voting against the merger between the Anglia Building Society and the Hastings and Thanet Building Society (now both part of Nationwide).
Likes: Time with the family, running on the moors and watching Spurs thump Arsenal and then go on to beat Chelsea to win the League Cup.
Hates: Negative people.
Relaxation: I’m not asking for sympathy, but relaxation has not been a big part of my agenda since last August.
Favourite food/restaurant: The Vaults in Ilkley – it doesn’t seem to mind the occasionally unruly behaviour of our two young daughters.
Current bedside book: I have a large pile of part-read books by my bedside. The one on top is Dostoyevsky’s Crime and Punishment.