Frank WesthoffMember of the Board of Managing Directors, DZ BANK AG
Alan OliverExternal Affairs Director, Nationwide
Modern mutuality in the UK
Alan Oliver, External Affairs Director
CIBP Congress, 22 October 2012
Agenda
1. Modern mutuality in the UK – an introduction to Nationwide & building societies legislation
2. Regulatory reform and impact on Nationwide Ring-fencing vital banking services Increasing loss absorbency Enhancing competition Recovery and resolution
3. Modern mutuality & regulatory reform
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Modern mutuality: introduction to NationwideNationwide is a member-owned mutual organisation which operates a different model to its major UK plc (non-mutual) banking peers
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Overview of a building society
• Primary purpose is to provide residential mortgage loans substantially funded by members’ savings
• Capital is owned by members (our customers), with value distributed to members through pricing/service – accordingly profit is optimised to underpin financial strength whilst also delivering long-term good value and first class service to customers
• Contrasts with the company / plc model, which is driven by profit maximisation to support increasing shareholder returns
Legal framework
• A minimum of 75% of business assets must be loans secured on residential property
• At least 50% of funding must be from retail depositors
• Restrictions on trading and use of derivatives
• Owned by members
Nationwide is a low risk business. As a mutual building society, we are restricted by statute from taking certain risks and proprietary trading
Characteristics of a building society
Consequences
• Assets are predominantly prime UK residential mortgages
• Primarily retail deposit funded
• No proprietary trading
• Stakeholder and customer interests are naturally aligned
• Value distribution to retail members paid out above the profit line
Practical Implications
• Asset mix leads to a low credit risk profile and a consistent presence in the mortgage and savings markets
• Simplified and stable earnings
• Focused on customer service and consistent delivery of member value
• Balanced business model, profit aligned with risk
Modern mutuality: introduction to NationwideNationwide is the largest UK mutual, with a strong business focus on residential mortgage loans substantially funded by members’ savings
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£0bn
£20bn
£40bn
£60bn
£80bn
£100bn
£120bn
£140bn
£160bn
£180bn
£200bn
Assets Liabilities & equity
Prime Mortgages £104bn
Specialist Lending £22bn
Retail Savings (including customer deposits)
£131bn
Wholesale funding £47bn
Capital £6bnOther Liabilities £10bn
Liquidity £33bn
Other Assets £10bn
Consumer Banking £3bn
Commercial loans £22bn
Source: Company as at Sep 2011
#3 largest personal finance balance sheet in the UK: £194bn total assets
Nationwide is the clear leader in the UK mutual sector, with 50% of the £375bn total assets held by the sector
Source: Building Society Association
Nationwide50%
Co-Operative Banking Group
18%
Yorkshire8%
Coventry6%
Skipton4%
Other 44 Societies
14%
We are the UK’s third largest mortgage and second largest savings provider, with total assets of £194bn
Ranking of UK financial institutions by retail mortgage balances
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Source: Company and broker analysis
• Strong UK market position‒ #1 UK retail savings brand‒ 11.2% UK savings balances market share‒ 10.5% retail mortgages market share ‒ 15.2% tax-exempt ISA products market share‒ 6.4% of main current accounts
• Single recognised challenger brand‒ Total balance growth in savings of £2.4bn in H1
11/12 (16.7% market share)‒ 185,000 new current accounts in H1 11/12 (over
9% market share of new account openings in the year to August 2011)
• Diversification across personal financial services‒ 1.6m credit card base, new issuance up 58% on
same period last year‒ Personal loan sales up 61% on same period last
year 0%
5%
10%
15%
20%
25%
Lloyds Santander Nationwide Barclays RBS HSBC
Modern mutuality: introduction to Nationwide
£0bn
£100bn
£200bn
£300bn
£400bn
HSBC RBS Barclays Nationwide Santander Lloyds
Major UK retail banks’ total asset size 2010
Verde1
Source: Company reports
Note1 Verde is the name given by Lloyds to a project to divest c£70bn assets to satisfy the EU on competition grounds
• One of the few financial institutions to adequately manage capital through the crisis– We met all requirements of the regulatory authorities
• Prudent balance sheet management has allowed us to achieve amongst the highest capital ratios in the UK– 12.7% CET1 ratio compares favourably to selected peer average of 10.8%1
• Capital has been viewed as a strength of Nationwide• However, capital pressures on the business are increasing
– Increasing focus by regulators on CET1 levels– Introduction of leverage ratio – disproportionately impacts stable, low-risk business models such as Nationwide
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Prudent approach to balance sheet and capital management
Modern mutuality: introduction to Nationwide
Note1 Peer group includes the CET1 ratios of Barclays, HSBC, RBS, Lloyds and Santander as of H1 2011
Number 1 for customer service
Being on our members’ side
Providing a good deal for savers in low interest environment
Supporting the housing market
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Commitment to our 15 million members
Introduction to Nationwide
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History of building society legislation
Modern mutuality: building societies legislation
Building Societies (Funding) and
Mutual Societies (Transfers) Act 2007
Enabling legislationto provide for:
-an increase to the current 50%
non-member funding limit to a minimum
of 75%
-a change to the priorities on
dissolution andwinding-up ensuring
that ordinary shareholders rank
equally with ordinary creditors
-the transfer of a society’s business to
the subsidiary of another mutual
society. Enabled by order on
4 March 2009
Building Societies Act 1997
Restricted activities: a building society may not:
-act as a market maker in securities, commodities
or currencies-trade in commodities or
currencies
-enter into transactions involving derivatives, except in relation to hedging or for
its customers
Prohibition on creating floating charges over the
whole or part of a society’s undertaking or property
(other than a floating charge when the Bank of England
has provided the society with financial assistance)
Acquisition or establishment of a
significant non core business must
receive prior approval of members
Building Societies Act 1997
New principal purposefor building societies
introduced which includes loans
secured on rented Housing (“buy to let”
advances)
Nature limits revised:at least 75% of trading assets must be loans
fully secured on residential property and at least
50% of total group funding must be from members
Change from a prescriptive to a
permissive regimeallowing societies to pursue
any activity in their memorandum subject to the
nature limits Individual investors to be
given membership (subject to certain
exceptions) and prohibition on accepting corporate
bodies as members (other than by the holding of PIBS)
Deregulation Act 1994 and other amending
orders
April 1995- power for certain large
societies to provide loans
and overdrafts to businesses
June 1995- societies may own banking
subsidiaries subjectto authorisation
by the Bank of England
1996 – wholesale funding limit
raised to 50% of a
society’s liabilities
1996- removal of statutory obligation
on societies to stand behind their
subsidiaries
Various amending orders1988 – wholesale
funding limit raised to 40% of a society’s
liabilities
1988- power to provide banking,
investment and insurance
services and trusteeship,
executorships and land services
1991- order made to enable
societies to issue permanent bearing shares (PIBS) which counted as
society capital
1992- order made to enable societies
to issue subordinated debt which counted as
society capital
Building Societies Act 1986
50% of funds mustbe from members
and 80% of assets must be loans to members
Wholesale funding limit of 20% of a
society’s liabilities introduced
Power to convert to plc status,
thereby demutualising
Power for larger societies to use swaps and other instruments for
interest rate and currency rate
hedging
Power to invest in subsidiaries orother designated
associated bodies
Consol-idated the Building
Society Act 1874
20071997 1994 - 19961988 - 199219861962
Building Societies (Funding) and
Mutual Societies (Transfers) Act 2007
Enabling legislationto provide for:
-an increase to the current 50%
non-member funding limit to a minimum
of 75%
-a change to the priorities on
dissolution andwinding-up ensuring
that ordinary shareholders rank
equally with ordinary creditors
-the transfer of a society’s business to
the subsidiary of another mutual
society. Enabled by order on
4 March 2009
Building Societies Act 1997
Restricted activities: a building society may not:
-act as a market maker in securities, commodities
or currencies-trade in commodities or
currencies
-enter into transactions involving derivatives, except in relation to hedging or for
its customers
Prohibition on creating floating charges over the
whole or part of a society’s undertaking or property
(other than a floating charge when the Bank of England
has provided the society with financial assistance)
Acquisition or establishment of a
significant non core business must
receive prior approval of members
Building Societies Act 1997
New principal purposefor building societies
introduced which includes loans
secured on rented Housing (“buy to let”
advances)
Nature limits revised:at least 75% of trading assets must be loans
fully secured on residential property and at least
50% of total group funding must be from members
Change from a prescriptive to a
permissive regimeallowing societies to pursue
any activity in their memorandum subject to the
nature limits Individual investors to be
given membership (subject to certain
exceptions) and prohibition on accepting corporate
bodies as members (other than by the holding of PIBS)
Deregulation Act 1994 and other amending
orders
April 1995- power for certain large
societies to provide loans
and overdrafts to businesses
June 1995- societies may own banking
subsidiaries subjectto authorisation
by the Bank of England
1996 – wholesale funding limit
raised to 50% of a
society’s liabilities
1996- removal of statutory obligation
on societies to stand behind their
subsidiaries
Various amending orders1988 – wholesale
funding limit raised to 40% of a society’s
liabilities
1988- power to provide banking,
investment and insurance
services and trusteeship,
executorships and land services
1991- order made to enable
societies to issue permanent bearing shares (PIBS) which counted as
society capital
1992- order made to enable societies
to issue subordinated debt which counted as
society capital
Building Societies Act 1986
50% of funds mustbe from members
and 80% of assets must be loans to members
Wholesale funding limit of 20% of a
society’s liabilities introduced
Power to convert to plc status,
thereby demutualising
Power for larger societies to use swaps and other instruments for
interest rate and currency rate
hedging
Power to invest in subsidiaries orother designated
associated bodies
Consol-idated the Building
Society Act 1874
20071997 1994 - 19961988 - 199219861962
Section 5: “principal purpose”- retain as it has proved to be an effective business model
Section 6: “lending limit”- amend to provide flexibility to ensure long term future for societies
Section 7: “funding limit”- level playing field with ‘retail ring fenced banks’
Section 8: “deposit” – v – “shares”- retain as upholds mutuality
Section 9: various restrictions on: - entering into certain financial transactions (Section 9A)
- creating certain charges (Section 9B)- repeal to avoid inconsistency with ‘retail ring fenced banks’
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Key statutory features & the case for modernisation
Modern mutuality: building societies legislation
Ring-fencing vital banking services
Increasing financial institutions’ loss absorbency
Enhancing competition
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UK banking reform
Regulatory reform
Appropriate measure to reduce the risk to taxpayers from future crises
Nationwide – operating under ring-fence-type conditions for many years – has shown that ring-fencing and a growing, competitive business are not mutually exclusive.
We support a retail ring-fence but building societies must be able to compete effectively with ring-fenced banks
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Ring-fenced banks and building societies legislation must be consistent
Regulatory reform: ring-fencing
Low margin, low risk appetite and Challenger status results in low risk-weights for our assets and limits returns – and therefore capital generation.
Simple transparent balance sheet focused on the real economy generates trust and access to wholesale deposits.
Therefore we have ready access to liquidity, restricted access to capital and low risk weights.
As a result we are uniquely impacted by the leverage ratio.
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Leverage ratio uniquely impacts Nationwide
Regulatory reform: loss absorbency
We are fully supportive of the Vickers’ proposals for insured depositor preference, given the current position of building society members on insolvency and as the FSCS burden on the industry will be reduced.
Preferring all depositors would send a clear message to customers and ensure two depositor classes are not created.
We recognise that altering creditor hierarchies is sensitive – but at the very least the Government should implement the relevant provisions of the Butterfill Act to ensure all depositors are treated equally, whether their savings are with a bank or building society.
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Strong support for depositor preference
Regulatory reform: loss absorbency
We fully support the aims of increasing current account switching and enhancing transparency of terms and conditions.
The ICB’s proposals to improve the switching process – a seven day guarantee and the creation of a redirection system for payments by September 2013 – will be costly (estimated to be between £650 million and £850 million).
But we are working closely with the rest of the industry to take forward this initiative.
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Simple solutions to improve current account competition
Regulatory reform: competition
Mutuals do not have access to external capital.
We are pleased that current CRR text makes clear that mutuals will be able to issue instruments with capped distributions.
Core Capital Deferred Shares (CCDS) – Nationwide’s new capital instrument
FSA and EBA: no anticipated objections to instrument qualifying as Core Tier 1 capital
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Unable to issue external capital in response to higher regulatory requirements
Regulatory reform: capital requirements
Implementation of the crisis management framework should be proportionate & realistic.
The cumulative burden of so much simultaneous regulatory change is beginning to have a disproportionate effect on building societies’ competitive capacity.
Any contributions to a resolution fund should be calculated on a risk-adjusted basis to recognise the unique business model of building societies.
Given our conservative funding profile, it is not appropriate for the mutual sector to be subject to the same ‘bail-in’ mechanics as higher risk institutions.
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Proportionality and risk-based approach to crisis management
Regulatory reform: recovery & resolution
Regulatory reform is necessary, and building societies should play an appropriate role in this agenda.
Reforms should not dilute the ability of existing and future challenger brands to compete effectively with the big banks.
Reforms should not discriminate against or disproportionately impact on particular business models, such as low-risk, retail-focused mutuals. Indeed, through the imposition of a ring-fence, it is exactly these types of institutions that Vickers intends to encourage.
Regulation should be based on the risk posed by institutions.
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A diverse, lower risk, more competitive financial services sector
Modern mutuality & regulatory reform
Reforms should not dilute the ability of existing and future challenger brands to compete effectively with the big banks.
Reforms should not discriminate against or disproportionately impact on particular business models, such as low-risk, retail-focused mutuals. Indeed, through the imposition of a ring-fence, it is exactly these types of institutions that the ICB intends to encourage.
Regulation should be based on the risk posed by institutions.
Building societies and ring-fenced banks should remain distinct – but there should be consistency, as far as is appropriate, between the permitted activities of the two.
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Reform should be guided by the following principles
Modern mutuality & regulatory reformThank you
Alan Oliver, External Affairs [email protected]