The Building Societies Association represents mutual lenders and deposit takers in the UK including all 45 UK building societies. Building societies have total assets of nearly £330 billion and, together with their subsidiaries, hold residential mortgages of over £230 billion, 18% of the total outstanding in the UK. They hold over £230 billion of retail deposits, accounting for 19% of all such deposits in the UK. Building societies account for about 28% of all cash ISA balances. They employ approximately 39,000 full and part-time staff and operate through approximately 1,600 branches.
We welcome the opportunity to comment on this discussion paper which aims to provide supervisors with a common understanding of the elements to be assessed regarding liquidity and funding risk, and also the set of criteria to be used. Our overall view is that they are similar to the elements currently used by the Prudential Regulation Authority (“PRA”) and its forerunner, the Financial Services Authority (“FSA”) in its supervisory liquidity review process, in the UK, and are therefore familiar to our members. But it is difficult to comment further without sight of the detailed proposals which will be available later.
The common methodology and process, and the methodology for the overall supervisory review and evaluation (“SREP”) liquidity score, outlined in this paper will eventually form part of the final overall SREP guidelines. These guidelines – to be published end 2014 - will also include a range of possible liquidity supervisory measures.
We note the common elements in the discussion paper are not meant to be exhaustive and will allow supervisors leeway to take into account other criteria relevant to the credit institution. We welcome this move, as we do the references to proportionality.
Much is rightly made of Article 97(4) of the Capital Requirements Directive that introduces the principle of proportionality with regard to SREP by stating that the “competent authorities shall establish the frequency and intensity of the review and evaluation process having regard to the size, systemic importance, nature, scale and complexity of the activities of the institution concerned and taking into account the principle of proportionality”. Paragraph 14 of the discussion paper goes on to say that competent authorities should take into account that not all the elements in the methodology have the same relevance for all institutions. Furthermore, the methodology may be interpreted as applying with a lesser degree of granularity to non-systemically important institutions. The last part is especially welcome as it sets out clearly that non-systemically important institutions – in the UK, the vast majority of building societies – should not be subject to the same amount of detail as systemically important institutions.
In the UK, domestic regulators such as the PRA (when part of the FSA) have in the past acknowledged this difference by, for example, introducing a simplified liquidity regime for non-systemically important institutions. A feature of this simplified regime is that smaller institutions are permitted to carry out a pared-down version of the individual liquidity adequacy assessment. But with some European regulators, in regulatory reporting for instance, non-systemically important institutions such as building societies have suffered a disproportionate and disruptive burden from being bracketed with large, complex and internationally active systemic institutions. In most cases, a set of key figures is all that is needed.
We therefore urge the EBA to ensure that when it is formulating its final proposals, it includes explicit and concrete provisions that limit the scope of supervisory review for small, non-systemically important institutions.
Read the EBA discussion paper here: