Alarm over return to ‘fatal’ high-risk loans

The Times Katherine Griffiths Banking Editor

Last updated at 12:01AM, May 22 2015

Britain’s most senior financial regulator has warned building societies that they must not return to the “fatal” high-risk lending that helped trigger the financial crisis and led to the demise of some of the country’s biggest mutuals.

Andrew Bailey, chief executive of the Prudential Regulation Authority, said there was evidence that building societies were making large loans compared with the value of a property and the customer’s income.

The regulator is “watching this carefully”, Mr Bailey said, and is also closely monitoring the mutual sector for any signs that societies are getting sucked into risky loans to customers with poor credit histories or to buyers of commercial property.

Building societies became mired in high-risk lending in the run-up to the financial crisis in 2008 as they sought to boost their returns against competition from the bigger banks. Several, including the Cheshire, Derbyshire and Dunfermline, collapsed or had to be rescued.

“Lenders ventured into higher loan-to-value, sub-prime and commercial property lending without having adequate risk management. We also saw this in the late 1980s and early 1990s. This diversification was generally not successful and in some cases fatal,” Mr Bailey told the building societies’ annual conference in Harrogate, North Yorkshire, yesterday.

Mr Bailey said that the main concern was about the large loans compared with income and property value. However, also on the radar is the growth in loans to landlords among building societies and banks, but the evidence at the moment is that buy-to-let is not “poorer quality than owner occupier”.

The authority is also scrutinising financial institutions’ IT systems. The costs and complexity of updating systems and the risk of cyberattacks were core concerns, Mr Bailey said.

The IT systems of smaller lenders are seen to be particularly vulnerable to problems because of a lack of investment.

The Co-operative Bank, which was part of the mutually-owned Co-operative Society, developed a £1.5 billion black hole in its accounts, partly because of IT problems which stretched back to its acquisition of the Britannia Building Society in 2009. The bank had to be bailed out by bondholders, who now own 80 per cent.

Mr Bailey said that building societies were meeting the authority’s requirements on capital and liquidity and that there was a “role for mutuals”. The sector accounted for just over a third of new mortgage lending last year.

Mr Bailey set out more details of the responsibility of boards under the incoming rules intended to make senior managers of financial institutions more accountable for performance. “Clarity of responsibility is, I hope, unobjectionable. But this is not clarity in the sense of facilitating witch hunts,” Mr Bailey said.

The authority launched a consultation yesterday on the role of board directors that will sit alongside the senior managers regime, the regulatory framework which will replace the current conduct regime for banks and some other financial companies from March 7 next year.

Boards are to take collective responsibility for the firm’s strategy, risk appetite and ethical behaviour, Mr Bailey said. However, the purpose of the incoming rules will be to attach ultimate responsibility to the chief executive and relevant high-level executives.

The senior managers regime was proposed by the parliamentary commission on banking standards after a public outcry that bankers such as Fred Goodwin, former chief executive of RBS, could not be prosecuted for the near-collapse of their institutions.

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