BSA response to the FSA's discussion paper on liquidity - DP 07/7

Background

The Building Societies Association represents all 59 building societies in the United Kingdom. Building societies have total assets of just under £350 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, more than 20% of the total outstanding in the UK. Societies hold about £215 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for over 38% of all cash ISA balances. Building societies employ over 50,000 full and part-time staff and operate through more than 2,100 branches.

Introduction

This response represents the views of a range of building societies.  Most societies answered the majority of questions posed; some chose to address only those most pertinent to their own business.

Main points

a. Reaction to current market conditions

All building societies have reviewed their liquidity policies and strengthened their liquidity risk management practices.  Societies have found that wholesale funding is still obtainable through the short-term money markets but long-term funding is more difficult to source. The result is a shortening of duration of wholesale funding.

There have been significant pricing implications with a rise in both the retail and wholesale cost of funds.

Those larger societies that use overseas funding have found that market hit hard following the crisis at the Northern Rock.  Overseas investors remain concerned about the UK mortgage market and are not willing to consider lending to UK financial institutions at this time.

b. A way forward

Most societies believe access to the Bank of England’s standing facilities with wider eligible collateral to be a necessary part of any contingency funding arrangements.  But access to central bank liquidity has been effectively denied to smaller building societies because of the restricted instrument list and the prohibitive cost.  Until the range of collateral is permanently widened, access is made simpler and any stigma associated with using central bank facilities removed, participation will be less compelling.

Societies believe the mismatch approach, suitably refined, would provide a starting point for the development of a new liquidity regime.  There was concern, however, on the definition of high quality assets. 

Feedback

On 27 May 2008, the FSA published a summary of the 36 written responses it received.  A consultation paper is expected in autumn 2008.