Mutuals have lesson for banks

Sep 17 2009 By Peter Jackson, The Journal

THEY learn nothing and forget nothing, it was said of the Bourbons. The same is true of banks. Well, actually, banks just learn nothing.

It should come therefore as no surprise for us to read that, even with the world financial crisis still unresolved, they are up to their old tricks.

The Institute for Public Policy Research (IPPR) reports that the rapid return to the City’s bonus culture indicates that real reform has been "very limited".

So the talk is of greater regulation to impose responsibility. While this will certainly be necessary, it might be more beneficial to tackle the culture which encourages such excesses and think about revisiting another model – that of the mutuals and building societies.

As the shareholder banks are charged with irresponsibility, arrogance, remoteness from the real world and greed, the mutuals can point proudly to their own record of accountability to members and customers, to their democratic engagement, to their emphasis on the long-term and to their deep roots within the regions and communities they serve.

True, at their recent May annual conference the building societies had their knuckles rapped by the Financial Services Authority for their inadequate risk management. This followed the recent failure of several societies which had to seek mergers with larger rivals.

The Scarborough had to be rescued by the Skipton, The Barnsley by the Yorkshire, Cheshire and Dunfermline by Nationwide and The Catholic by The Chelsea.

But the FSA also made it clear that the societies had been nothing like as irresponsible as the banks.

And to be fair, there is a strong argument that the banks were responsible for the mutuals’ difficulties.

The Dunfermline’s problems, for example, were partly caused by buying third party loans, which turned bad, but this was against a background of banks such as Northern Rock and HBOS pursuing highly aggressive strategies, often offering what were effectively loss-leading mortgage products so that some of the smaller building societies had to take risks to compete.

Unlike banks, we should not forget, and should learn from the fact that out of the 10 building societies which chose to demutualise in the mid to late 1990s to become plcs, directly or indirectly, not one is now left as an independent financial organisation.

Peter Jackson is a writer and former business editor of The Journal – p.jackson77@btinternet.com