Tighter FSA rules could restrict loans

In the wake of the banking crisis, the Financial Services Authority is planning new rules around the levels of capital and liquid assets lenders must hold in reserve.

Bankers believe these rules could force them to hold more capital against housing association loans. This could push up interest payments across social housing, as loan agreements allow lenders to pass the costs of additional regulation to their customers. The financial watchdog is expected to be particularly critical of long-term loans, such as those typical in social housing, which are funded through short-term borrowing in interbank markets.

Gill Rowley, head of private finance at the Tenant Services Authority, said: ‘While everybody expects that the FSA will introduce increased requirements around capital and liquidity, the concern is that these [will be] increased to such an extent that it has an impact on the availability and pricing of debt for the sector.’

She expected that ‘virtually all’ the sector’s existing loans would have clauses allowing lenders to pass on additional costs.

New rules could also make it more difficult for housing associations to obtain the long-term, 25 to 30-year loan facilities they depend upon.

Andrew Heywood, deputy head of policy at the Council of Mortgage Lenders, said: ‘We’ve already seen some movement in terms towards shorter maturities, because lenders anticipate the FSA is likely to be much more critical about what it calls a funding mismatch - borrowing short and lending long.’

There are now ‘a couple’ of lenders in social housing finance that will not arrange loans extending more than seven years, according to Mike Jones, managing director of Tribal Treasury Services.

The FSA was concerned that banks were exposing themselves to ‘refinancing risk’ by funding long-term loans with short-term borrowing, he explained. But the move towards shorter maturities would create problems for housing associations with 30-syear business plans. ‘If they’re looking at funding [those plans] on seven or 10-year debt, they’re looking at refinancing risk,’ Mr Jones added.

An FSA spokesperson said the watchdog was consulting ‘on a transitional phase [for the new arrangements]’ and will report in the autumn.

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