Baroness Kramer (LD)

My Lords, the Minister is exactly right, of course. Building societies and mutually owned banks are absolutely crucial to our economy. They hold some 29% of all outstanding residential mortgages, and that figure is growing. They are especially significant for first-time buyers as conventional banks are less active in this market. So, as we try to solve the housing crisis and restore economic growth, both the capacity of the sector to grow and its lending matter—but so, too, does the stability of the sector. As the Minister said, the Building Societies Act 1986 requires that a building society must raise at least 50% of its funds from individual member deposits, with the consequence that funding from wholesale markets cannot exceed 50%. However, this order changes the way in which the 50% is calculated to specify that certain funding sources will be excluded from the wholesale calculation. The examples given include specific Bank of England liquidity facilities, loss-absorbing instruments —we would typically cite MREL—and specific repo agreements. This is clearly of importance to the larger societies. It sets them on a more level playing field in competing against banks, as well as increasing their lending capacity. However, even though I support this change, I have two questions. First, have the Government assessed the impact of increased wholesale funding in times of interest rate volatility? I point out to the Minister that there will be an increase in wholesale funding, if one is not going to be highly technical, because MREL, for example, is raised in the wholesale markets, as are the repos. A number of the instruments that are covered and will be excluded from the calculation are, in fact, wholesale market transactions. Funding short—the characteristic of the wholesale funds—and lending long, at a fixed rate, was the curse of HBOS when it failed. Once, in a conversation with me that discussed such a situation, Warren Buffett’s number two, Charlie Munger, talked of funding short and lending long as living proof of the walking dead. It is a riskier strategy because of the duration mismatch. I am not suggesting that these changes are going to lead to those extreme outcomes, but it is clear that the squeeze on margins that comes from greater wholesale funding can end up inhibiting lending—and does so exactly at the time when the economy typically needs new liquidity and lending the most. My second question is slightly different. Is there any risk of diluting the mutual identity by, in a sense, changing this weighting of wholesale versus membership funding? Building societies are much more community-driven than conventional banks. If that link were weakened by the need to respond to the pressures from wholesale lenders, we would all be losers, frankly. I would appreciate the Government’s comments on that. The other issue in this statutory instrument, offering choice on how to execute documents, strikes me as simple common sense. Frankly, I had no idea that common seals are still in use. Indeed, I may be the only person in this building who has actually closed contracts by using a seal. That was under armed guard, because it had to be removed from the vaults and every movement was observed, because the seal was of such extraordinary value. I really thought that those days were over, and I am pleased that building societies are now going to be relieved of the burden.