Mutual benefits of new investment idea

Building societies are keen to devise a new way to cope with tough new capital requirements without threatening their mutuality.

The new concept goes under the name of "Mods" – which stands for "mutual ordinary deferred shares".

Mods are similar to bonds, but are loss-bearing.

The proposals have been welcomed by Yorkshire's three biggest building societies – Yorkshire Building Society, Skipton and Leeds.

The Yorkshire, the UK's second biggest mutual, said the introduction of Mods will be good for the sector as a whole.

Andy Caton, the Yorkshire's corporate development director, said: "We have been campaigning to get on a level playing field with the banks for some time, which includes the requirement for a new capital instrument that supports our mutual model.

"While the Yorkshire has one of the strongest capital positions of any UK bank or building society and therefore no immediate requirement for a new capital raising instrument, we welcome the creation of Mods,

which demonstrates that the regulators recognise the importance of a diversified financial market."

The Building Societies Association (BSA) said Mods would be issued in much the same way as Pibs (permanent interest-bearing shares).

It said the Mods would probably be issued to institutional investors, but would be more loss-absorbent than Pibs and would count as core tier one capital.

In theory any society that wants to supplement its reserves by raising extra core tier one capital will be able to use Mods.

But the BSA said they are more likely to be used by larger societies, as transaction costs can make smaller issues less economic.

The BSA said that work is still taking place on the introduction of Mods, but it expects the instrument to be finalised later in the year.

Adrian Coles, director general of the BSA said: "With the concentration from regulators on the need for banks and building societies to have adequate capital, it is not surprising that building societies have been looking at their position.

"Societies rely mostly, but not exclusively, on the profits that they have built up over the years, but we think it's sensible for us to spend more time looking for new forms of capital that would meet

both the regulator's requirements and at the same time not compromise our historic commitment to the interests of customers, rather than external investors."

David Pickersgill, deputy chief executive of the Leeds said: "A number of high street banks have benefited from capital injections at the taxpayers' expense.

"Building societies haven't been helped in this way and as a result there isn't a level playing field. So it makes sense to introduce a new form of capital."

He added that it is important that the new proposals do not compromise its long-standing commitment to the interests of its members rather than external investors.

Skipton Building Society said that it is broadly supportive of the new proposals, but wanted to look at them in more detail before commenting.

All three Yorkshire societies will update the market on current trading when they report results next week.

Leeds is reporting next Monday, Skipton will update on Wednesday and the Yorkshire is due to report on Thursday.

Leeds, Skipton and the Yorkshire building societies have sent a letter to the Minister for Yorkshire and The Humber, Rosie Winterton supporting the new proposals.

"If an instrument exists whereby societies can raise fresh (private sector) capital the sector would be better able to return to growth, supply credit, on a prudent basis, to the wider economy, and provide a strong source of competition to an increasingly monopolistic banking sector," they said in the letter.

Record year for business finance

Skipton Business Finance yesterday reported an increase in both clients and profits for the year ending 2009.

The group reported a record year in 2009, with clientele up 20 per cent and profits up 17 per cent.

Managing director Greg Bell said: "I believe our success in 2009 has been down to quick, pragmatic and commercial underwriting during difficult market conditions."

Andy Grantham, sales and marketing director, said that clients turned down by the high street banks continue to be lucrative for SBF.

"We tend to look at where a business is going rather than its historical balance sheet performance, and many of our new clients will have initially been turned away by their own bank," he said.

"In reality, there is nothing inherently wrong with their business models and we are more than happy to support these types of clients."

SBF is owned by the Skipton Building Society.