Explanatory note
(This note is not part of the Order)
This Order provides that building societies can count as part of their capital subordinated debt which meets certain conditions specified in the Order.
The first criterion of prudent management to be satisfied by any building society, set out in section 45 of the Building Societies Act 1986, requires maintenace of adequate reserves and other designated capital resources. Section 45(5) provides that the Commission, with the consent of the Treasury, may by Order specify descriptions of capital resources of building societies. The Commission may specify the extent to which capital resources may be aggregated with reserves and may attach conditions.
Debt is treated under this Order as subordinated where the creditor’s right to repayment in the event of a winding up is subordinated to the rights of other creditors, including the shareholders in the society as respects the principal of their shares and interest due on them.
The other conditions which the debt must meet are that the debt has an initial maturity of at least five years and one day (or is repayable on notice of at least that period) and that it must be denominated in sterling.
The limits on the extent to which such debt can be counted are:
that the amount counted must not exceed 50 per cent of a society’s reserves; and
from the time when the residual maturity falls to five years, the amount to be counted is progressively reduced to zero over that five years.