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The Bank of England has announced plans to scrap the rules that restrict the risk-taking of building society imposed after the collapse of former mutually owned lenders Northern Rock and Bradford & Bingley during the financial crisis.
The decision to free society from additional restrictions on lending and financial activities shows that regulators are confident that member-owned lenders are in a more solid position, 17 years after the worst crash in their 250-year history.
The move is part of a broader set of measures announced by the BOE in recent months to loosen the rules of UK lenders in response to Prime Minister Kiel Starmer’s call to regulators to focus on supporting UK competitiveness and economic growth.
Charlotte Gerken, BOE executive director of UK Depositor Supervisor, said the proposal to scrap the so-called “sourcebook of a constructed society” would “has a major impact on supporting UK competition and growth.”
Gerken said in a speech at the Architectural Association Association’s annual meeting in Birmingham on Thursday that due to legal restrictions, mutually owned lenders have limited ability to raise external capital and there is a high level of exposure to mortgages.
However, Gerken added that the central bank determined that “subject to detailed supervision was improved in sector risk management as long as the expectations of detailed supervision serve their purposes.”
Ruth Doubleday, head of Prudential Regulations for the Architectural Association Association, welcomed Beau’s proposal as “a major landmark we admire,” saying, “a society with too long buildings is seriously constrained by fixed rate lending restrictions in the sourcebook.
“Even when regulators are outdated, it is rare for them to remove existing regulations, and in the case of source books it is grossly coordinated, anti-competitive and has a variety of unintended consequences,” Doubleday said.
In 2015, the BOE imposed additional rules for constructed societies, including those imposed by the BOE to address the weaknesses it unveiled by the 2007-08 meltdown in the sector.
Some of the UK’s largest architectural associations have been bailed out by the UK government after being hit by a housing market conflict and evaporation of the faith of investors and depositors in lenders. Northern Rock and Bradford & Bingley are preparing for the financial crisis.
Last year, the UK Building Association had £525 million worth of assets, including a £396 million mortgage. According to the Building Association, it accounts for 29% of the total domestic loans.
If the restrictions were removed, “the construction society can increase loans,” Doubleday said.
Gerken said the building society has recovered in recent years and, as well as the rapid growth of mortgage lending and deposits, the building society maintains “soundingly prudent indicators with a strong capital and liquidity position.”
She expressed confidence that the BOE Prudential Regulatory Authority, which oversees lenders, “has the right regulatory and supervisory tools to assess the safety and soundness of the architectural society and act in the weak areas we identify.”
She added that continuing to set detailed rules only to build a society that does not apply to other lenders would “become an imbalanced approach.”
BOE has announced several recent measures to support more lenders. For example, they exempt more lenders from restrictions on how much they can borrow or requirements to issue debts that can be wiped out in the crisis. We also proposed a simplified set of capital rules for small lenders.
