Financial Services: perhaps building societies are trendy again

During demutualisation 1989-2000, they fell out of favour.  But the sub-prime mortgage debacle ended all that.

The third largest building society, Coventry, is eyeing failed mortgage bank Northern Rock. The society hasn't yet made a formal bid, but the BBC reports its statement says "remutualising Northern Rock "as part of Coventry Building Society" might make sense".

So, after the demutualisation disaster, remutualising a failed lender is now on the cards.  Since Birmingham pub-owner Richard Kettley opened the first society in 1775, societies lent only from deposits.  But the ten demutualised institutions (Northern Rock, Halifax and the rest)  tended to get into trouble after converson.  As they competed vigorously for ever larger chunks of the mortgage market, many lent with scant regard for the security of the asset or the ability of the borrower to repay.  They also played at the financial roulette table in mortgage-backed securities, dodgy derivatives and the American housing dream.  It ended in tears for some and massive debt responsibilities for the general public.  

Suddenly, traditional societies look less staid. There are stirrings in the Society sector.  Coventry Building Society's acquisitorial stance is not unique.  Consolidation is once again in vogue as societies strengthen their balance sheets, exit risky strategies, enhance their customer bases and increase their product offerings.

Yorkshire Building Society, the second biggest, is in merger talks with Norwich & Peterborough Building Society, the nineth largest, according to The Guardian in a report on March 19 this year.

The building society deposit account, once seen as a safe haven for long term investment (yet for a while superceded by other riskier options) must appear an attractive proposition once again.  Kevin Mountford of Moneysupermarket.com told the BBC, "We are currently seeing healthy competition in the savings market, with banks and building societies fighting for funds."

And so long as societies persist in cautious lending policies the sector will provide the mortgages so desparately needed by first-time buyers, newly-weds and growing families.

There are some 40 societies left in England, ranging from the tiny Penrith Building Society in Cumbria with assets of £89m, to the huge Swindon-headquartered Nationwide Building Society with £191,397m in group assets.  It's still a flourishing sector with eleven of the societies holding assets of over a billion pounds. 

With assets of £21,139m, the Coventry Building Society should acquire the problematic Northern Rock if possible and put the indebted nationalised bank back on its feet.  Hard pressed taxpayers will be very relieved if they make a success of it.

The Evening Standard reports that Building Societies Association director general Adian Coles  said: "The BSA welcomes the commitment by the Government to foster diversity, promote mutuals and create a more competitive banking industry.  Keeping a reformed Northern Rock independent of the big banks would be good for competition."  You said it, Adrian.  Let the Coventry manage it.

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