Nationwide Building Society, the largest thrift in the U.K. with GBP60 billion (USD85 billion) in assets, and Yorkshire Building Society, which has over GBP11 billion in assets, are preparing to make their first use of derivatives to remove credit risk from their balance sheets. The plans come on the back of a recent change to legislation that now allows building societies to tap the credit market.
Credit derivatives are an excellent mechanism for transferring risk, according toJim Coleman, assistant treasurer at Nationwide in Northampton. He noted that building societies have traditionally stored assets on their balance sheets but could now use credit derivatives to transfer risk to a third party via securitizations. One example Coleman gave was to securitize loans it originates to transfer council houses to the private sector.
Chris Parrish, group treasurer at Yorkshire Building Society in Bradford, said he envisages the most likely use for credit derivatives would be to hedge the credit risk on a medium-term note program or for synthetic securitizations. However he is still investigating the use and talking to investment banks, such as UBS and J.P. Morgan. Officials at both banks declined comment.
The U.K. Building Societies Act was amended to allow building societies to use credit derivatives last month. In a recent letter sent to building society chief executives the Building Society Commission outlined which types of societies may use credit derivatives (to download the letter in pdf format, click here).
