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Text of a speech by Graham Beale, Chairman, The Building Societies Association to the BSA Annual Conference Dinner, Harrogate – 20 May 2009
John
Thank you for your introduction and kind words.
It is a great honour to be asked to take over as Chairman of the BSA. I am conscious that I follow in the footsteps of John who has made an outstanding contribution to this role in the last year, more of which I will talk about later. Needless to say I believe that building societies offer a real and attractive alternative to banks and I see my role and the role of the BSA as promoting the virtues, which are the hallmark characteristics of building societies; being open and honest, offering long term good value, offering great service, treating customers fairly and providing security.
I strongly suspect that my time as Chairman will coincide with some of the biggest changes to affect our sector since the conversion of a number of prominent societies in the 1990s. The application of the SRR on Dunfermline was a defining moment. On a more positive note the forthcoming merger between Britannia and Co-operative Financial Services will be another key milestone. John has already outlined the challenges facing the sector in his speech earlier today and I agree with his assessment.
However, as we work through the impact of the recession and the impact of failures in the banking sector and in our own sector we need to maintain a sense of proportion and context.
Building societies play a very important role in local communities all around the country – either through the branches of national institutions like my own or through the activities of local and regional societies. And it remains the case – and let us not lose sight of this – that no investor in a building society has lost any of their investment since at least 1945.
Contrast this with the billions lost by the plc banking sector in the last 18 months that is money lost by ordinary shareholders and employees in the likes of Northern Rock, HBOS and RBS. There is no comparison.
The Treasury signalled in its prelude to the budget that it wants the ‘mutual sector to thrive’. The Treasury Select Committee has referred to building societies as ‘unsung heroes’ of the credit crisis and even called for the remutulisation of Northern Rock. Perhaps we could call it the Northern Soc. Well it is time to turn fine words into action. We require a considered and measured response to the impact of the credit crisis on mutuals and not a panic attack. And we require specific support to help us through the credit crisis and to put us on a level playing field with the banks.
There are many examples of how the tripartite, driven by government policy, can help us. Again John outlined his own view on some potential solutions. I am going to focus on three specific areas:
1. Funding. In the second half of 2008 Northern Rock and NS&I took 70% of retail funding in the UK. Treasury needs to understand that retail funding is finite and if it takes funding out of the system it diverts funding away from building societies which in turn means that we will be unable to lend in the mortgage market. And this in turn has consequences for the economy.
Government funding initiatives are either disproportionately expensive for building societies or bypass our sector all together. So my first message is to The Treasury. They must manage the affairs of state owned institutions such that they do not distort the market and they must engage with rather than ignore the building society sector to provide the same funding support that the larger players enjoy. Take the Credit Guarantee Scheme – is it right that the cost to Nationwide is 65% more than the Lloyds Bank Group pay or an estimated 35% more than RBS pay? And what’s more is it also right that other societies are referenced to Nationwide plus an additional premium or worse still, are denied access altogether.
2. Stress testing. A good starting point for any stress test is to have a proper understanding of the market and its dynamics, an understanding of the risks and an understanding of the business environment and to build these factors into risk models. Let’s take Moody’s recent actions. If you apply extreme assumptions to a stress test model you will get extreme outcomes. And in the case of Moody's we have an American model, populated by American assumptions overseen by a credit committee that sits in Europe and which is heavily influenced from New York. As Lord Turner said in the Turner Review, you need a qualitative assessment and understanding sitting alongside the models to prevent model madness – does the output look and feel right? Is it realistic? I hope the FSA and others heed Lord Turner’s words because at the moment they seem to defer to the agencies’ judgements. Where was the support for the sector when Moody's gave their unduly pessimistic assessment? The plain fact is we are working through an economic downturn. Building societies carry high levels of capital, a low dependency on wholesale markets and have balance sheets comprising high quality assets. Yes there are exceptions, as there are within any sector, but on the whole the sector is well placed to work through the recession if given the chance. I hesitate to use the term rock solid but to quote from the oracle, Robert Peston’s recent blog on building societies, “there isn’t a story of some great looming financial crisis”.
3. FSCS. So much has been said already about the disproportionate effect of the FSCS levy on building societies. I will not repeat the points other than to say that when we announce our annual results next week they will include a charge and provisions in excess of £250m for FSCS. This amounts to the day light robbery of our members and the operation of the FSCS must be changed to prevent a repeat of this injustice in the future. Aside from the well rehearsed issues surrounding FSCS there are some less well publicised anomalies which require correction. One of the biggest concerns facing savers today is the security of their savings. We will all have experienced members with large deposits managing their balances to a maximum of £50,000 per institution. This is the most protection that we can offer. Nationwide has merged with two societies in the last year and acquired the franchise, retail liabilities and branches of a third. A bank can acquire subsidiaries and preserve their FSCS guarantees. Not so a building society . So where today we have a group wide guarantee of £50,000. If we were a bank we could offer £200,000, across the Group. So much for a level playing field. And whilst this may sound like a slightly selfish point on my part it does apply to Yorkshire, Skipton and Chelsea who have all undertaken mergers and anybody else currently contemplating a merger.
So, in conclusion, now is the time for HMG to make clear its commitment to the mutual sector, to turn words into action and to provide the same level of support to our sector that has been provided to the plc banking sector. It is not a time for over- reaction or dismissing the sector as unimportant. I repeat John’s conclusion from this morning
- it costs less to support the mutuals than plcs
- it achieves more across the country
- it will resonate with the public trust and confidence in building societies
