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Home > Blogs > Ian Fraser > Remutualizing Britain's ex-building societies might benefit its banks

Remutualizing Britain's ex-building societies might benefit its banks

Banking reform | Remutualizing Britain's ex-building societies might benefit its banks Ian Fraser

Vast quantities of hot air and newsprint have been expended by British politicians and media on how to reform the banking sector, make it more customer-centric and less capable of being "bilked" by bonus-hungry executive teams.

But despite its near-death experience in October 2008, it's fair to say nothing substantial has really changed yet (other than that half Britain's banks are now wards of the state and continue to be massively subsidized by the UK taxpayer). The bankers' mantra is that the "time for apologizing is over" and it's time they were left alone to get back to business as usual.

The mood in Britain is turning ugly (to see what I mean watch this clip from Channel 4's 10 O'Clock Live from about 7 minutes).

It seems most Britons detest the banking sector right now, and it's not difficult to see why. They have born the economic cost of rescuing the sector from the collective insanity that came over it in 2003-07 yet they have having to contend with even ropier service than before, even shabbier treatment of SMEs, and they have also had to contend with the nauseating spectacle of the likes of Barclays Bob Diamond and Lloyds Banking Group's Eric Daniels trying to pretend all is well with banking and that it's fine for traders and executives to keep paying themselves obscene sums of money.

Given the parlous state of the national balance sheet, some sections of the UK government would like to return the nationalized and semi-nationalized banks - including Royal Bank of Scotland, Lloyds Banking Group and Northern Rock - to the private sector as quickly as possible in order to raise cash.

However there's a small but growing movement that wants to persuade the UK government that, rather than going for a fast buck by selling its bank holdings to the highest bidder (most likely an overseas bank like Santander or an acquisition vehicle like Lord Levene's Aim-listed NBNK Investments) it should be thinking longer term (even if this implies a smaller return for the Exchequer).

The idea is that divisions of the state-owned banks - the two that spring to mind are Northern Rock and Trustee Savings Bank (part of Lloyds since 1995) - should be allowed to get back to their mutually-owned roots.

As I highlighted in my "Reinventing Finance" speech in August 2009 this would help create a saner financial system in the UK. Not only would the resurgence of a mutual sector promote financial "biodiversity", it would also hopefully usher in a renewed focus on customer service over sales. A reinvigorated mutual sector (which is far stronger in many European countries, including France and Germany, than it is in the UK) would also counterbalance the herd-like and lemming-like instincts of the publicly listed banks, however well or badly they are regulated.

The idea now seems to be gaining currency in the corridors of power. In September 2010, the Building Societies sector argued for the remutualization of Northern Rock, whose 10-year stint as a publicly-listed bank ended in ignominious failure in September 2007, and which was nationalized in March 2008. In a submission to the Treasury Select Committee's inquiry into 'competition and choice in the banking sector, the BSA said:

"If a long-term view is taken in relation to divesting the state’s ownership of Northern Rock, converting the failed bank back to a mutual becomes a viable option. This could be achieved by arranging for Northern Rock to pay returns to the taxpayer over a number of years to repay the injection of capital.

Remutualization would help to foster diversity and promote mutuals, and deserves serious consideration by the Government."

Last week a group composed of MPs from the main political parties stepped up the pressure and also called for Northern Rock to remutualized. The campaign is being led by Chuka Umunna, who was elected Labour MP for Streatham in May 2010. He’s one of the 17 MPs who signed an "early day motion" pushing for Northern Rock to be returned to its building society roots.

Umunna wants the government to launch a feasibility study into the remutualization of "The Rock" saying that returning the business to its customers was his "preferred option". Umunna, who now sits on the Treasury Select Committee, added:

"If we are serious about changing the way the sector operates and its attitude, what better way to start than by remutualising Northern Rock? I think it would be a massive missed opportunity if the Government did not look at remutualisation. The worst outcome would be if one of the large banks was allowed to gobble up Northern Rock.”

Catherine McKinnell, MP, said remutualizing Northern Rock "will be a first and important step towards transforming and better democratizing our banking system."

The group of MPs intervened after UK Financial Investments, the arm’s-length organization charged with looking after the government's holdings in the banking sector, said it was looking for an investment bank to start working on ways to return Northern Rock to the private sector.

And, bizarrely, it seems the government might even be listening. At a hearing of the Treasury committee last week, Keith Morgan, the UKFI executive responsible for Northern Rock, said remutualization was being considered. "It's a realistic possibility," Morgan said.

According to a report in The Guardian last week, the "good bank", Northern Rock plc, which has been stripped of the taxpayer loan used to prop it up in 2007, is now funded by retail deposits. It has been split off from the "bad bank", home of the failed bank's troubled loans and £22bn of government money, which has been united with Bradford & Bingley's mortgages to create a holding company known as UK Asset Resolution.

Personally though, I am not that hopeful that Umunna's modest proposal will gain political traction. The trouble is that privatizing state-owned banks through trade sales to existing bank players (or possibly even via IPOs) is a much more lucrative solution for the government in the short-term.

However any government that believes in the long-term health and viability of its banking and financial sector ought to be giving Umunna's proposal serious consideration.

Further reading on banking reform and restructuring the UK banking sector:

Tags: banking , corporate governance , Mergers and Acquisitions , remutualization , UK
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