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The Bank of England has announced plans to scrap rules restricting risk-taking at building societies that it imposed after the collapse of former mutually-owned lenders Northern Rock and Bradford & Bingley in the financial crisis.

The decision to free building societies from extra restrictions on their lending and treasury activities shows regulators are confident the member-owned lenders are in a more solid position, 17 years after they were hit by the worst crash in their 250-year history.

The move is part of a wider set of measures announced by the BoE in recent months to loosen the rules for UK lenders in response to Prime Minister Sir Keir Starmer’s call for regulators to focus on supporting British competitiveness and economic growth.

Charlotte Gerken, BoE executive director for UK deposit takers supervision, said the proposal to scrap the so-called “building societies sourcebook” would “have a significant impact in enhancing competition and supporting growth in the UK”.

Gerken said in a speech at the annual conference of the Building Societies Association in Birmingham on Thursday that because of their legal restrictions, mutually owned lenders had a limited ability to raise external capital and a high level of exposure to mortgages. 

But Gerken added that the central bank judged “risk management in the sector as having improved to the extent that detailed supervisory expectations have served their purpose”.

Ruth Doubleday, head of prudential regulation at the Building Societies Association, welcomed the BoE’s proposal as “a major landmark, which we applaud”, adding: “For too long building societies have been seriously constrained by the fixed rate lending limits in the sourcebook.

“It’s rare and challenging for the regulators to remove existing regulation, even when it is outdated, and in the case of the sourcebook, badly calibrated, anti-competitive and has various unintended consequences,” Doubleday said.

The extra rules for building societies, including restrictions on how many fixed-rate mortgages they can have, were imposed by the BoE in 2015 to address weaknesses revealed by the 2007-08 meltdown in the sector.

Several of the UK’s biggest building societies were bailed out by the British government after they were hit by a housing market crash and an evaporation of investor and depositor faith in lenders. Northern Rock and Bradford & Bingley demutualised in the run-up to the financial crisis.

Last year, UK building societies had £525bn of assets, including £396bn of residential mortgages — accounting for 29 per cent of gross lending in the country, according to the Building Societies Association.

Removing the limits would “enable building societies to increase their lending”, Doubleday said.

Gerken said the building society sector had recovered in recent years, pointing out that as well as rapid growth in mortgage lending and deposits, building societies have also maintained “sound prudential metrics, with strong capital and liquidity positions”.

She expressed confidence that the BoE’s Prudential Regulation Authority, which supervises lenders, “has the right regulatory and supervisory tools to assess building societies’ safety and soundness, and to act on weak areas we identify”. 

Continuing to set detailed rules only for building societies that do not apply to other lenders “would be a disproportionate approach”, she added.

The BoE has announced several recent measures to support smaller lenders, such as exempting more of them from a limit on how much they can borrow and from a requirement to issue debt that can be wiped out in a crisis. It also proposed a simplified set of capital rules for smaller lenders.