Building Societies Association
By Adrian Coles, Director General, The Building Societies Association
This was the headline used in the Sunday Telegraph on 8 June earlier this year to introduce an article explaining how the value of windfalls made available on the demutualisation of building societies in 1997 had, in its word, “plummeted”.
More generally, in the light of the difficulties of the demutualised institutions, a number of commentators have asked whether demutualisation was, after all, such a good idea. The Times on 16 June 2008 published a leader in which it commented on the difficulties being faced by banks adding “What is doubly sad is that some of the most battered banks are former building societies – those once prudent institutions woven into the fabric of British life. Northern Rock, of course, is the most egregious casualty. But this week HBOS, formerly the mighty Halifax Building Society, is taking the humiliating step of asking its army of small shareholders for £4 billion in new capital. Bradford & Bingley, Britain’s biggest buy-to-let lender, is the laughing stock of the City after its own botched attempt at raising money. Alliance & Leicester, its shares languishing at one fifth of the level of 18 months ago is being kicked out of the FTSE 100, the club of blue chip companies.”
The Times wondered whether the demutualisation trend of 10 years ago was sensible. “Of itself the move to plc status was harmless. But it had two dangerous elements. It liberated those once cautious building society bosses to diversify into new activities, and provided them with the capital to do so. It also loaded them with remuneration packages so poorly structured that they encouraged short-term recklessness.”
The Observer on 8 June advanced similar sentiments. Ruth Sunderland notes that the credit crunch has not left anyone unscathed, including the remaining mutuals. “But the constraints of mutuality which the listed mortgage banks were so keen to shed have given some protection. Societies are legally required to keep at least 50% of their funds in retail deposits from savers. They could not emulate Northern Rock…” Sunderland concludes that “the best argument for mutuality is blindingly simple – a building society is owned by its savers and borrowers so its sole purpose is to serve them. That goal is not complicated by a conflicting need to satisfy the square mile.”
On 3 June 2008 Simon English writing in The Evening Standard says that demutualisation has been “a disaster”. His article catalogues the well known failings of the demutualised institutions and suggests that building societies should stick to their knitting – they “were formed to provide cheap access to home loans in perpetuity, not to chase the latest wheeze, or worry if the size of their business was getting ever larger.”
Jeff Salway in The Scotsman on 7 June 2008 notes that “few of the groups [including insurance companies] that relinquished their mutual status in the past decade can be described as success stories”. Mr Salway concludes his article by saying that “if you just want competitive sayings rates, good personal service and a range of home loans from a prudent business that’s well equipped to ride out global market shocks, building societies remain a solid bet.”
On 8 June, Emma Simon wrote in The Sunday Telegraph that “it has been a rotten harvest for those that have held on to their windfall shares”. She notes the sharp decline in the share prices of the individual institutions which demutualised in 1997. A similar article appeared in The Observer on 9 June, and again comments on the weak strategies pursued by the demutualised institutions.
Finally, on 7 June 2008 Jeremy Warner, writing in The Independent, says that “today the demutualisation dream lies in tatters. All of the building societies that did it have either gone or are shadows of their former selves”. After mentioning the trend in the share prices of the former societies, Mr Warner concludes that “a perfectly viable industry which performed a vital public service in a reasonably well managed responsible fashion, has been completely destroyed. As ever, it was greed that did it.” He goes on to look at corporate governance issues suggesting that “the governance arrangements of building societies have proved rather sounder than those of the heavily “incentivised” bankers. Building societies’ management may be stuffy and old fashioned, but at least they don’t go blowing their capital on CDO’s and hare-brained acquisition making. They have proved better stewards of their businesses than their converted counterparts. Prudential regulation of building societies also seems to be sounder.”
No doubt we will see more building society mergers in the future – we already know that the Catholic Building Society will be merging with the Chelsea later this year. However, this will not mean that the mutual model is destroyed. Many commentators seems to be making the point that the demutualised model has been.
