Introduction

The Building Societies Association represents mutual lenders and deposit takers in the UK including all 48 UK building societies. Mutual lenders and deposit takers have total assets of over £365 billion and, together with their subsidiaries, hold residential mortgages of almost £235 billion, 19% of the total outstanding in the UK. They hold more than £245 billion of retail deposits, accounting for 22% of all such deposits in the UK. Mutual deposit takers account for about 36% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

Q3.1: Do you agree with our proposals to amend the transitional provision (BIPRU TP29) for simplified ILAS BIPRU firms?

Background

In 2009, the FSA issued its final rules on liquidity risk management including transitional provisions. These included a phased introduction over three years of quantitative standards for firms on the simplified ILAS approach (“simplified ILAS firms”), starting October 2010. Many simplified ILAS firms are smaller building societies.

But there were no such transitional provisions for the mainly larger firms on the standard ILAS approach; they would have to hold 100% of their buffer requirement only when economic recovery was assured. This ruling changed in November 2010. Then the FSA announced that it would not be setting transitional rules for standard ILAS firms until the EU had decided how to implement Basel Committee global liquidity requirements. These requirements are planned to take effect from 1 January 2015.

Proposal

The FSA is proposing to harmonise the implementation dates for simplified and standard ILAS firms for the build up of their liquid assets buffer so that both types will hold 100% of their quantitative requirements by 1 January 2015. For simplified ILAS firms that means they must hold 30% of their simplified buffer requirement until 28 February 2012, 50% until 30 June 2013, 70% until 31 December 2014 and 100% thereafter. In practice, this signifies that the transitional provisions have been extended by 15 months.

FSA quarterly consultation paper no 27, CP 11/1 (see chapter 3)

Our response

We welcome and support this proposal. But we have a few minor comments to add.

In chapter 3.8, the FSA says it is “preferable” to harmonise the timeframes. We believe it is much more than that. It is only fair and reasonable to harmonise the timeframes. There is no reason why simplified ILAS firms should be required to hold more liquid assets proportionately at an earlier date than standard ILAS firms.

The narrow range of liquid assets allowed in the buffer offers little financial return, which depresses profitability. If simplified ILAS firms have to keep to the original 2013 date for holding 100% of the buffer, they would have higher costs for a longer period proportionately than the standard ILAS firms.

We are surprised to see no review of the percentages of the simplified ILAS firms’ liquid assets buffer. In view of the continuing financial downturn and the effects of very low interest rates on institutions such as building societies, we feel this is an opportunity missed.

Finally, we would like assurance that if the 1 January 2015 implementation date of the Basel Committee global liquidity requirements were somehow delayed, then the switch on date for the full ILAS regime, both simplified and standard, would similarly be delayed.