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June 5, 2009

FSA addresses building society risk management

by Gill Montia

Story link: FSA addresses building society risk management

The Financial Services Authority (FSA) has launched a consultation aimed at ensuring that building societies with “less traditional” business models have the risk management systems and skills they need.

The regulator’s retail managing director, Jon Pain, says: “Our approach is very simple; the more diversification, the higher the level of management skills and systems and controls the FSA will demand from the firm.”

The activities of Building societies are limited by the Building Societies Act and according to Mr Pain, the proposed new measures will leave societies free to “innovate and diversify” but not “beyond the limits of their risk management skills”.

Concern for the UK’s mutual sector has been growing since the sudden collapse of Dunfermline Building Society in March, although the credit crisis had already seen a number of small societies rescued by their larger rivals.

Then in April, Moody’s downgraded the credit ratings of several societies: Nationwide saw its financial strength rating cut from B to C-; Chelsea Building Society from C to E+ and West Bromwich from C- to E+.

Ratings for Coventry, Newcastle, Norwich & Peterborough, Principality, Skipton, Yorkshire and Britannia were also downwardly reassessed.

There followed reports that a number of local authorities would be withdrawing millions in deposits from downgraded societies once fixed terms expire, certain authorities having already been heavily criticised for ignoring the credit ratings of Icelandic banks.

More recently, Nationwide reported a 69% fall in profit for the 12 months to 4th April 2009; provision for bad debts increased to £394 million, compared with £106 million a year earlier.

The FSA is now taking an interest in building societies’ business models, which should reflect the sector’s reputation for responsible and cautious lending but could contain some nasty surprises.

The consultation period ends on 5th September.

 

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