The Building Societies Association (BSA) welcomes the Financial Policy Committee’s (FPC) review of the UK’s capital framework. A refreshed approach is needed to ensure regulation supports both financial stability and sustainable economic growth.
The BSA supports the FPC’s decision to reduce the overall target level of Tier 1 capital from 14% to 13%. This small but important adjustment helps ensure that capital levels remain strong without unnecessarily constraining lending, homeownership or wider economic activity.
Building societies continued to support their members throughout the pandemic, cost-of-living crisis and market volatility, without seeing a material rise in mortgage losses. Yet current capital rules require societies to hold around ten times the minimum Pillar 1 requirement against low-risk mortgages. This can restrict lending to first-time buyers and reduce the economic contribution generated by house purchases.
The BSA is calling on the FPC to consider how the different capital components interact in practice, and to ensure that tools such as the leverage ratio and macro-prudential buffers are proportionate for mutuals. A one-size fits all approach risks limiting the growth of the mutual sector and reducing business-model diversity, both of which are important for long-term financial stability and competition in the mortgage market.
Ruth Doubleday, Head of Prudential Regulation at the BSA said:
“It is appropriate for the FPC to review and refine how the capital framework is functioning in practice, particularly aspects that are not part of the international framework and therefore gold-plating. Regulations need to be robust, but not punitive to the point of stifling growth of sustainable lending and homeownership.
“On the question of buffer usability, this is the wrong answer to the wrong question! A better question is how the FPC’s policies can better support lending through the economic cycle. Building societies have shown time and again that they support mortgage lending, even when the wider market pulls back. Overly conservative capital add-ons for low-risk mortgages are holding back lending to first-time buyers and limiting the sector’s ability to contribute to growth.
“Getting the right balance of strong, sensible regulation will help more people achieve homeownership and support the wider UK economy. With the government commitment to double the size of the mutual sector, we urge the regulator to ensure the capital framework enables, rather than constrains, responsible growth.”
