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Mutuals close to agreement on capital

Source: Reuters - Mon 15th Feb 2010

Britain's mutually-owned building societies are close to finalising details of an investment instrument that would meet new bank capital rules without compromising their mutual status, the Financial Times reported on Monday.

Talks are close to agreement on the creation of "mutual ordinary deferred shares" or Mods, the FT said, citing industry sources.

These are instruments that would have a capped coupon like a bond, but also be able to absorb losses.

Building societies, which provide home loans and savings products, are owned by their members rather than shareholders, which makes it difficult for them to create instruments that convert into equity.

After the credit crisis, financial regulators want banks to hold more capital that absorbs losses in times of stress.

Until now, building societies have used a form of permanent interest-bearing shares, which have payouts that are not pegged to profits.

But these instruments are not loss-bearing and so cannot count as the highest form of bank capital - Tier 1, the FT said.

Mods would have a target fixed return, but, in exceptional circumstances, building societies would be able to renege on paying it, the newspaper said.

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