Industry response

Proposed amendment to the regulatory valuation of available-for-sale debt securities, chapter 3 of the FSA's quarterly consultation, CP 09/12

Introduction

The Building Societies Association represents all 53 building societies in the United Kingdom. Building societies have total assets of £385 billion and, together with their subsidiaries, hold residential mortgages of almost £250 billion, more than 20% of the total outstanding in the UK. Societies hold over £240 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 37% of all cash ISA balances. Building societies employ over 51,500 full and part-time staff and operate through more than 2,000 branches.

Scope

The regulatory valuation issue discussed below affects only those building societies that are required to prepare their financial statements in accordance with IFRS. In practice, this means societies that have issued permanent interest bearing shares.

The proposal

In chapter 3, the FSA confirms its treatment of assets reclassified from available for sale to loans and receivables as currently allowed by the waiver by consent handbook modification.

The prudential filter at GENPRU 1.3.36(2) (b) requires firms to derecognise any unrealised gains or losses on debt instruments held in the AFS category. The modifications now proposed by the FSA will ensure that the derecognition prudential filter continues to apply to debt instruments that have been reclassified from AFS to loans and receivables, so that unrealised gains or losses do not have to be included in regulatory capital calculations.

We find these proposals helpful; they mean that building societies wishing to derecognise unrealised gains and losses on reclassification from AFS will no longer have to take the waiver by consent route.

We have no further comment.

Quarterly consultation (no 20), CP 09/12