FSA proposes new risk strategy for UK’s building societies

| June 7, 2009 | 0 Comments
”FSA

Following the collapse of the Dunfermline building society and the rescue of other societies last year, the Financial Services Authority (FSA) is proposing to stop building societies expanding into risky types of lending and borrowing.

The move comes after a senior FSA official accused some societies of taking far too many risks with their lending in the last few years at the Building Societies Association’s (BSA) annual conference recently.

The City Watchdog wants societies to have managers who are sufficiently skilled to oversee any riskier lending.

Hugh May of the FSA said: “We have seen unsustainable margins on prime lending, over-ambitious growth targets and a risk appetite that was too great.”

“The fact remains that a number of societies did not act sensibly at the onset of the crisis and some saw it as a business growth opportunity. We see that as a fundamental error, as was carrying on or even starting commercial and high-risk lending in 2008,” added Mr May.

In the last 12 months alone, eight of the UK’s remaining building societies have reported significant losses due to a combination of lending self-certified and sub-prime mortgages, making commercial property loans, as well as cash held with Icelandic banks.

At the end of March, Dunfermline building society collapsed and it was revealed that it had secured £628 million of loans on commercial properties, despite FSA warnings about the risks involved.

The FSA’s new guidance is initially the subject of formal consultation.

In related news, in April, ratings agency Moody’s downgraded several building societies due to concerns about higher than expected credit losses on residential and commercial property loans.

Moody’s said it was concerned that these financial institutions will not have the funds to endure any further losses, and is also concerned about the strength of their mortgage books.

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