A report published today for the Building Societies Association (BSA) reveals a strong case for converting failed banks into mutual organisations. In light of the report, the BSA urges the Government to consider seriously returning Northern Rock bank to the mutual sector.
The report, by the Centre for Mutual and Employee-owned Business at the University of Oxford, concludes that there are three economic arguments for a stronger mutual sector as part of a mixed financial system: 'bio-diversity', risk appetite and competition.
A financial system with diverse ownership and governance structures is better able to weather the strains of the business cycle than one which is plc-dominated, says the report. Mutuals can counter-balance the short-termist pressure of the City. Mutuals also help reduce the concentration of financial sector resources and employment in the City, dispersing wealth and welfare to regional and local economies.
The report finds that mutuals tend to adopt a lower risk profile because their objective is safety and fair pricing for members, not profit extraction for shareholders.
Keeping a reformed Northern Rock independent of the big banks would be good for competition. A remutualised Northern Rock would help the Government to meet its policy objective of supporting competition and diversity through the maintenance of a strong mutually-owned financial sector.
Repaying the taxpayer
In any exit process the Government needs to achieve optimum value for the taxpayer. A re-launched and remutualised Northern Rock can repay the taxpayer stake over time. A deferred payment profile can give the optimum outcome, both returning the full value to the taxpayer and achieving other public policy goals.
Commenting on the report,
The Rt Hon John McFall, MP, Chairman of the Treasury Select Committee, said:
"This is a timely contribution to the debate on the future of our financial services sector. If ever there was a time for an expanded mutual sector, it's now. We desperately need to restore faith in financial services in this country"
Adrian Coles, Director-General of the Building Societies Association, said:
"The Government has said that financial mutuals can provide a robust alternative to financial services companies in the future - what better way to demonstrate this than to seriously consider returning Northern Rock to the mutual sector?
"Given that remutualisation would strengthen competition and create a more diversified financial sector, it could be expected to generate an advantage to the taxpayer over the long run in excess of the immediate benefit of any capital proceeds in the short run."
Jonathan Michie, Professor of Innovation and Knowledge Exchange at the University of Oxford and primary author of the report, said:
"We must not allow the UK's financial services sector to return to the 'business as usual' model that has proved so costly to the economy and public finances. Already we are seeing a return to the bonus culture. This is fuelled by profits boosted by the increased market power of banks. It is vital that the banks face strong competition from mutual building societies. That would also reduce the risk of the credit crunch being repeated. Remutualising Northern Rock would thus deliver to consumers and taxpayers."
Notes to Editors
A copy of the full report, Converting failed financial institutions into mutual organisations, can be viewed on the BSA website here http://www.bsa.org.uk/docs/presspdfs/remutualisation.pdf
Adrian Coles, BSA Director-General, will be launching the report at a Labour Party Conference fringe event on Sunday 27 September. Financial meltdown - who can you trust? 6.00pm -7.30pm, Chartwell Room, Hilton Metropole, Brighton.
Northern Rock was a building society up until October 1997 when it converted to a bank. In February 2008, Northern Rock was taken into temporary public ownership where it remains today.
Photographs of Adrian Coles and Jonathan Michie are available from the BSA press office.
The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 52 UK building societies. Building societies have total assets of over £370 billion, and, together with their subsidiaries, hold residential mortgages of over £245 billion, more than 20% of the total outstanding in the UK.
Rt Hon John McFall MP will be speaking at a fringe meeting at the Labour Party Conference on Monday 28th September at 17.00, titled 'The Feeling's Mutual: the campaign to re-mutualise the failed banks and put people before profit'
Jonathan Michie, primary author of the report, can be reached on 07889 274951 or firstname.lastname@example.org
Jonathan is Professor of Innovation and Knowledge Exchange at the University of Oxford where he is Director of the Department for Continuing Education, President of Kellogg College, and Director of the Oxford Centre for Mutual & Employee-owned Business.
Adrian Coles, BSA Director-General
020 7520 5901 email@example.com
Night/weekend: 07713 682262