Rule changes will ease societies' funding task

PRESSURE on building societies to convert to banks will be eased by two key changes emerging from the Treasury and the Building Societies Commission, writes Peter Rodgers.

Yesterday the commission unveiled rules that will allow societies to securitise their mortgage portfolios, by repackaging them as bonds and selling them to professional investors.

Next week the Treasury is expected to announce an increase in the amount societies can raise in the money markets, from the present ceiling of 40 per cent of borrowings to 50 per cent.

Neither announcement is related to the Lloyds Bank bid for Cheltenham & Gloucester Building Society, but industry specialists believe the changes could make some societies think again about changing their status.

The effect of the moves will be to give societies cheaper and more flexible means of funding their mortgage lending. Societies have been pressing for closer parity with banks, which can already securitise their mortgages and face no limits on their money market funding. The banks' access to cheaper and more flexible funding has helped them to take a big slice of the building societies' mortgage market share in recent years.

By securitising, a society offloads responsibility for part of its existing mortgage lending to professional investors in the bond markets. The proceeds of selling the mortgages can be used to make new loans to customers on better terms than if the money had to be raised from high street deposits.

The Building Societies Association said it believed securitising would be cost-effective for perhaps half-a-dozen of the biggest societies. But City bond market specialists said as many as 20 to 30 societies were studying it.

Building societies are also to be allowed to sell PIBs (permanent interest bearing shares) to customers through branches. But they will have to point out the risks and sell a minimum of pounds 1,000 worth at a time.

At present the public can only buy PIBs through stockbrokers or financial advisers.