Funding policy - quick guide

Published: 30th July 2010 by William Webster

Wholesale markets can provide longer dated funds with a specific maturity date but this incurs refinancing risk. Furthermore a society that increases its reliance on wholesale funding not only increases its refinancing risk but also reduces the security of its members. This is because although the public sees society deposits as "safe" or even safer than bank deposits they are in fact subordinated.

In accordance with the 1986 Act societies should have a limit whereby at least 50% of funding comes from members' accounts.

Wholesale funding is divided into three categories:

1. Offshore/overseas retail accounts

2. Deposits from non-financial/non-individuals

3. Wholesale market funding

The regulator is expecting boards to impose an overall limit on wholesale funding and sub limits by each category.

The maturity profile of wholesale funding should be staggered so that large portions of funding do not mature at the same time. The FSA applies limits to funding with a maturity of three months or less. These limits are linked to a firm's SDLs.

The FSA expects building societies to make use of the Bank of England Reserve Account in order to manage their buffer requirement.

If you are going to use repo the appropriate risk management needs to be in place. If you are on a matched approach the FSA expects you to talk with them before you do repo. Societies on more sophisticated treasury risk management approaches are free to use repo without approaching the regulator. Firms using repo should obtain full legal advice before agreeing documentation.

The FSA does not expect societies on the Administered or Matched Approaches to have external credit ratings. This is because ratings need careful management and rating changes could leave a society vulnerable.

The FSA provides a detailed table for each treasury approach. This lists the funding instruments and applicable limits.

Where a society differs from its chosen approach it should expect dialogue with the FSA in order to ascertain whether it needs to realign its risks and controls.

For detailed guidance refer to FSA Policy Statement 10/5 A specialist sourcebook for building societies, Section 4 Funding.

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