PRA leverage ratio proposals risk harming government plan to double mutual sector

UK Prudential Regulation Authority (PRA) proposals to amend its “backstop” leverage ratio fail to fully consider building societiesʼ distinct business model, as well as the consequences for the government’s stated objective of doubling the size of the UK mutual sector.  

In its response to the PRAʼs consultation paper 2/25, the Building Societies Association (BSA), which represents the UK’s 42 mutuals, said that the leverage ratio was, in reality, acting as a “front stop” on lending by its members.

“The PRA should ask itself what it means to be a backstop? Does it mean that the policy intent is that it should be binding some of the time — for example, if the firm is growing too fast? Or is it appropriate that it applies all of the time for lower-risk business models like building societies?” the BSA said in its response to CP2/25.

Collectively, BSA members hold residential mortgages of over £395 billion — 24% of all such outstanding loans in the UK.

The PRA is proposing to raise the current threshold at which the leverage ratio applies, from £50 billion retail deposits to £70 billion. However, in its response, the BSA said the threshold should be raised to £105 billion, which would align it with the threshold for participation in the PRA’s bank capital stress test.

Intent

The PRA should consider the purpose and policy intent of the leverage ratio component of the Basel framework, the BSA said. When taken in conjunction with other capital requirements, building societies “were excessively constrained”.

“We do not believe that the Basel Committee was considering the impact on low-risk UK domestic [internal-rating based] building societies when it was calibrating the international capital framework, and we believe it is inappropriate to adopt a one-size-fits-all approach in this way,” the BSA said.

It believes the cumulative effect of the measures punishes low-risk mutuals.

Homeownership

The level at which the threshold is set had a “very direct impact” on the government’s policy to increase building and home ownership, the BSA added.

The BSA pointed out in its response that lending to first-time buyers is the sectorʼs raison dʼêtre. Ketleyʼs Building Society — the UK’s first — was founded at the Golden Cross Inn in Birmingham 250 years ago, to provide housing for its members.

Giving evidence to the Treasury Committee last month, Susan Allen, chief executive of Yorkshire Building Society (YBS), said if the capital rules were amended, she could help an extra 2,000 people into home ownership.

The constraint on mortgage lending resulting from the PRA’s cumulative policies (see table) should have been considered in the consultation’s cost-benefit analysis (CBA), the BSA said.

The PRA said it had consulted with its CBA Panel on its proposals and made a number of changes and added clarification to CP 2/25 based on Panel’s recommendations. Asked about the points raised by BSA, a PRA spokesperson said the regulator would “carefully consider all formal consultation responses and set out our final position in due course”.