BSA: European rules could hinder fixed-rate lending

Under the rules, mortgage providers must protect themselves by purchasing derivatives through a clearing provider to hedge against the risks associated with interest rates.

The BSA noted that during 2012-2013, building societies found a reasonable range of clearing providers and initial fee quotes were reasonable, however it is concerned the market has started to contract quite quickly. By early 2014, only one of two major clearing members were prepared to take on smaller society clients.

The BSA argues that small societies who either cannot obtain clearing services at all, or can do so only at excessive cost, will now be placed at a serious competitive disadvantage once mandatory clearing for interest rate swaps commences in 2016-17. It estimates around 10-12 building societies and some smaller banks could be affected.

During 2014, fixed rate lending accounted for 80-90% of societies’ gross lending. Moreover, in the recent post-crisis low interest rate environment, the protection element in fixed-rate lending means that this would constitute the most suitable product in many/most cases.

The BSA agrees that the systemic risks from unreported and uncleared OTC derivatives need to be mitigated by measures such as EMIR. However, the imposition of mandatory central clearing on small and very small credit institutions is "unnecessary" and "disproportionate".

The BSA proposal is to exempt from the clearing obligation small credit institutions – below a balance sheet total of at least €5 billion and preferably €8 billion – in respect of hedging/protection contracts only. It is also calling for measures, including to facilitate indirect clearing, to increase the range of clearing providers that medium sized and larger members can use.