UK to help building societies lend to business

LONDON (Reuters) - Britain is prepared to relax lending and funding requirements to make it easier for building societies to lend to small businesses and to stimulate competition in the financial services industry, the finance ministry said on Friday.

Current rules state that 50 percent of a building society's funding should be in the form of retail deposits and 75 percent of lending must be secured on residential property.

The government said it supported those limits as they differentiated building societies from banks and acted as safeguards. However, it would be flexible if mutually-owned building societies decide to offer more services to businesses.

"If this was part of the sector's strategy, then the government would be supportive of this development, and would be open to removing any constraints posed by legislation," it said.

Britain is desperate to boost lending to small companies which have suffered from a credit famine as mainstream high street banks focus on shrinking their balance sheets and building up capital reserves to meet new regulations.

Graham Beale, chief executive of Nationwide, said the government proposals would enable Britain's biggest building society to mount a challenge to the banks across a full range of retail financial services.

"We want to continue this vital role, expanding carefully over time into new areas such as SME (small business) banking," he said.

Financial Secretary Mark Hoban said the government wanted to increase choice and diversity in the sector.

"We believe that building societies can play a vital role in this. The proposals we are setting out today provide a real opportunity for societies to expand their services and attract a new generation of consumers," he said.

The proposals also state that rules governing building societies be amended to insure that they undergo the same ring-fencing proposed for banks and have equivalent capital buffers.

Banks are being asked to split off their retail banking from their riskier investment arms and to build up loss-absorbing capital to protect them in times of financial stress.

The number of building societies in Britain has diminished rapidly because many, such as Abbey National, Halifax and Alliance & Leicester, converted into public companies and were subsequently taken over by banks.

(Reporting by Matt Scuffham. Editing by Jane Merriman)