Chelsea Building Society Breaches SLS Terms
The Cheltenham-based society faces difficulties over its use of the Bank’s Special Liquidity Scheme (SLS), which provides funding for banks and building societies so that they can continue to operate and lend to customers.
Chelsea breached SLS terms last week when ratings agency Moody’s downgraded its bonds, taking them below the minimum grade required to participate in the scheme. Moody’s also threatened to downgrade the bonds of several other societies, including Skipton and Coventry.
A spokeswoman for Chelsea said: “The downgrade has affected the way we participate in the scheme. We will be talking to the Bank of England and the FSA to look at what the Moody’s downgrade means.”
The Government is concerned about building societies because it does not want a repeat of last month’s collapse of Dunfermline, which had to be bailed out with £1.6bn. Politicians are also keen to keep building societies on their feet so that they can continue lending to customers.
The Bank could ease the problems of Chelsea and potentially other societies by relaxing the SLS’s conditions, by allowing banks and building societies to put forward bonds backed by assets that are below a AAA rating as collateral.
However, this option is thought to be undesirable as regulators do not want to have to unpick the legislation around the SLS to save a handful of societies.
Another option is for societies to put up more assets as collateral. The problem with this is that even if societies increase the collateral backing their bonds, this might not improve their credit ratings, and so would not restore their eligibility for the SLS.
The alternative is for societies to withdraw from the SLS and raise money in other ways. They could use the Bank’s discount window, which provides liquidity for one year rather than the three offered under the SLS.
All of the seven building societies highlighted by Moody’s could also issue bonds backed by the Government’s credit guarantee scheme, which gives investors a form of insurance that if a company collapses, the state will compensate them.
Category: News
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