O’Conall Street

Bradford and Bingley will probably have been nationalised by the time you read this. Another sign that irrespective of what deal is struck in Washington, the crisis in our financial markets will continue for months if not years and the tax payer have to dig deeper to protect homes and savings. B&B demutualised and floated on the London Stock Exchange in December 2000. In fact over the past decade nearly all the big building and mutual societies have abandoned their roots and headed for the stock market to serve a new god.
 
I know there were attractive business arguments for this mass embrace of global capitalism. The international money markets looked strong and stable. The cost of credit was falling and customers believed they could do much better with a big global bank then from a relatively small mutual society. But lets face it the big winners were the banking executives who over night inflated their salaries and were awarded attractive stakes in the ‘new banks’.

So what are building societies and why are they different from banks?

A building society is a mutual organisation. This means that instead of having shareholders, it has members who collectively own the business and are also its customers. The main examples of this type of organisation in the UK are co-operative societies, mutual insurance companies and building societies. Members have the right to vote for directors regardless of how much or how little money they have with the society.

Large businesses like banks may enjoy economies of scale. By having more customers and so lower unit costs, they might appear to outperform building societies in attracting customers. However, this is not always the case.

So why do people choose a building society over a bank?

Each building society invests its profit back into the society’s business. Unlike banks, mutuals do not pay dividends. In other words - your money works for you, not for some rich kid in the City. This enables the building society to offer competitive rates of interest on both savings and mortgages. It sets the rates it pays savers at just less than the rate charged to borrowers. This margin gives the society a profit. Many analysists believe this offers customers a much better deal.

Surely the time has come for governments in Britain and Ireland to support the recreation of mutual societies which are capable of supporting communities and which rely on people, not markets, for their future.

Customers choose to do business with a building society because many find them more personal, approachable and more trustworthy than banks. An independent survey during 2007 found significantly higher levels of saver and borrower satisfaction with customer service in building societies.

Given a crisis of confidence is at the heart of the current crisis, surely a trustworthy system which can support home owners and encourage a viable property market is a much better option then waiting up all night to see if some legislators in Washington DC are going to agree to save the world or not.

This would be funny if it were in the movies. Unfortunately it is all too real.

This entry was posted on Sunday, September 28th, 2008 at 8:09 am and is filed under Business, Politics, Public Affairs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.