Mutuals develop new capital instrument

Building societies are said to be creating an investment instrument which meets European capital rules but allows them to maintain their mutual status.

“Mutual ordinary deferred shares” would raise capital while at the same time be loss-absorbing for regulatory purposes, according to a report in today’s Financial Times.

The building society model, where institutions are owned by their members rather than the shareholders, has been under threat following new capital rules from Europe.

Building societies have also been desperately trying to attract retail deposits while competing for costly wholesale funding.

Mutuals cannot raise capital in the same way that banks can without compromising their mutual status.

West Bromwich Building Society created a similar instrument last June called Profit Participating Deferred Shares, which converted £182.5m of its debt into shares.

But as this effectively means building societies would be giving away a proportion of their profits, mutuals are disinclined to use this method as a way of raising capital, the FT report says.

One building society chief executive told the newspaper that the new MODs are expected to be agreed by the Financial Services Authority shortly.