Building societies draft new capital instruments

BUILDING society deposits will be more secure under plans being drawn up to change the way mutuals hold core tier one capital.

The industry is two thirds of the way towards creating new instruments with the working title of mutual ordinary deferred shares (Mods). Like bonds, Mods will carry a coupon but will be exposed to variability based on the profitability of the underlying business.

The instruments are designed to meet tough European regulatory requirements which demand that core tier one capital is permanent, loss-absorbing and subordinated to other forms of capital. The return has to be variable to avoid tying the issuing society into paying a fixed coupon at times of financial stress.

Because societies are owned by their members, not shareholders, they cannot use instruments which turn debt to equity.

Adrian Coles, chief executive of the Building Societies Association, said Mods were at least six months from coming into effect. When they do, they are expected to replace permanent interest-bearing shares for representing core tier one capital.