Prudential Regulation Authority Rulebook

2.1

The PRA expects building societies to be forward looking and for their boards to consider all the risks to which they are exposed. It is the responsibility of the boards and management of building societies (‘societies’) to ensure that they understand the financial and other risks to which the business is exposed, and to have appropriate systems in place to manage and control those risks.

2.2

While the SS highlights the key risks in the areas of lending and treasury activities, it is not intended to provide exhaustive coverage of all topics that boards should monitor and be aware of.

2.3

The general principle of aligning risk appetite with risk capability applies equally to all financial institutions supervised by the PRA, and the expectations included in this SS are therefore potentially of interest to other types of firms than building societies. However, the statutory restrictions on the business of all building societies have resulted in a relatively concentrated business model that necessitates specific guidance. Their mutual status means that there are particular constraints on societies’ access to external capital that make safe management of the business and conservation of capital resources a high priority.

2.4

The lending and treasury approaches set out in this SS are not intended to be ‘one size fits all’ and the portfolio limits suggested are indicative only. It is for each society to determine its own approach, based on its risk appetite, corporate plan, risk management capabilities and management expertise. Boards are expected to set appropriate individual limits for each relevant activity, having regard to those indicated for each defined approach. The PRA expects boards to monitor compliance with their chosen approaches, and to keep the PRA informed of any material changes in relevant policies.

2.5

The PRA recognises that, over time, societies may wish either to change individual limits or to move to more sophisticated approaches, as their business develops. Chapter 5 explains the supervisory expectations of how this may be achieved.

2.6

The PRA also recognises that a society may wish to diversify its business, within the constraints of the 1986 Act, into areas that are not covered by this Supervisory Statement. Where such diversification is significant, the PRA expects to be pre-notified of such intentions, as set out in Chapter 6 of this Statement.