Thu Jun 27, 2013 3:20am EDT
* Nationwide scrambles to come up with credible plan
* UK mutuals panic following Nationwide leverage order
* Lack of investor appetite casts doubt on new PIB product
By Aimee Donnellan
LONDON, June 26 (IFR) - UK bank regulators enforcing tough new rules on capital could be sounding the death knell for mutual societies, a cornerstone of the country's financial network for generations.
New regulations on capital intended to shore up Britain's banks and prevent another financial crisis are in fact leaving many mutuals fearing that the end could be near.
Nationwide, the UK's largest building society, is under pressure to produce a plan by week's end for how it will drum up an additional GBP2bn of reserve capital.
Coming on the heels of a similar hurdle for The Co-operative Bank, the troubles for Nationwide - in business since 1846 - could doom what is widely considered as one of the most ethical forms of banking.
"This really could be the death of the UK mutual," one banker who asked not to be named, because of the sensitivity of the subject, told IFR.
"Nationwide has always been a defender of its model and is considered to be not only the largest but the strongest of its kind."
GETTING STRONGER
The heart of the issue is the so-called leverage ratio - the amount of core capital that all banks have to hold in reserve against the total sum of loans they have made.
Nationwide has to increase its ratio from 2% to 3%, effective in 2019 - but the Prudential Regulation Authority (PRA) is pressing banks to spell out plans now for how to meet the target.
Nationwide has been given until the end of June, or midnight on Sunday, to outline how it will come up with the roughly GBP2bn it needs to comply.
A spokesperson for Nationwide spoke with IFR on Wednesday and said it is continuing to work with the PRA to agree on a mutually agreeable timeframe to meet these requirements.
"We are confident we will meet the 3% leverage ratio for the 2019 deadline," he said.
But despite that sentiment, the PRA has frustrated banks by deciding they must come up with their plans some four-and-a-half years early, imposing an advance deadline that few if any mutuals could hope to meet.
"If Nationwide is having to come up with a plan to sort out its leverage ratio," said one UK debt banker, "then you can bet your bottom dollar that other mutual societies will have to do the same."
There are currently 46 building societies and 50 mutual lenders and deposit-takers servicing customers in the UK, according to the Building Societies Association.
And investment bankers say that many of them have been calling over the past few days, anxiously trying to figure out ways of quickly boosting their leverage ratios.
The Co-operative was the first mutual to come under pressure from the PRA over the ratios and, facing a GBP1.5bn capital shortfall, is planning to de-mutualise and become listed bank.
Mutual societies, which are collectively owned by their depositors, have built a reputation as highly ethical institutions that often have close ties to local communities.
Their demise would be seen as another blow to institutions that return profit to stakeholders that are often customers and can lend at more attractive rates. But the short deadlines being imposed by the PRA seem to give little room for the mutuals to manoeuvre.
As one debt capital banker put it: "The deadline seems unrealistic."
Andrew Bailey, the deputy governor for prudential regulation at the Bank of England, declined to comment Wednesday about the deadlines but said all bank plans needed to be "sensible, consistent and achievable".
NO WAY OUT?
UK mutuals have traditionally sold Permanent Interest Bearing Shares (PIBS) to create core capital.
Nationwide's Pillar 3 disclosure states it has some GBP1.3bn of PIBS outstanding. However, their prices have fallen 20 points to the low 80s in cash terms since the PRA's announcement, which was far harsher than the market expected.
"The PRA is now only counting Core Equity Tier 1 in its numeration calculations, when they had been expected to look at total capital," said Edward Stevenson, head of financial institutions group debt capital markets at BNP Paribas.
"As a result, Nationwide needs to find GBP2bn of common equity to ensure its leverage ratio is where it should be."
To get around this problem, Nationwide could raise core capital deferred shares (CCDS), the new form of PIBS.
But bankers say that raising just a tenth of the GBP2bn would be a challenge due to a lack of investor appetite for the product.
While Nationwide is by no means the only UK financial to fail to meet the targeted leverage level, it has the lowest leverage ratio of all eight lenders analysed thus far by the UK regulator.
"The PRA is applying a very blunt measure to Nationwide, but in response they are coming up with a plan to solve the problem, which will include CCDS and some Additional Tier 1," said a London-based debt banker.
"This should placate the regulator for the time being, but their only option may be a Co-operative-style demutualising."
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