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Small societies to feel brunt of Basel II

17 March 2007

With many societies originating mortgages through the purchase of books from other lenders, the Basel II legislation could see the price and risk of obtaining loans increase.

This increase could put books beyond the reach of smaller societies, according to Linda Will, managing director of Accord:

“A lot of smaller societies have not been originating the mortgages so they have been buying books from other lenders. However, the effect of Basel II will mean the risk and cost of buying books will go up. If societies are unable to buy the books then they will not be able to cover their costs, and the long-talked about consolidation of societies could be stimulated.”

Gerald Gregory, managing director of capital investments at Britannia BS, believed it was too early to judge what specific impact it would have.

“Basel II allows firms to take their own view of risk and I think this is a positive step forward. But, and this may be a sweeping statement which might not happen, it may not be a step forward for small societies. Larger firms will have the resources to invest in risk-management systems to adapt but small societies probably won’t.”

However, Andrea Jeffries, policy adviser at the Building Societies Association, insisted smaller societies could still operate using the standard approach to risk management.

“Most societies will use the simpler approach to Basel II. A study by the regulator found there will be a reduction in the capital holding requirements so Basel II won’t drive mergers. Any driver was more likely to be the compliance burden, if anything.”