The collapse of the Dunfermline Building Society is the event we feared in recent months. Nor is it necessarily the only major building society that will cease trading before the global crisis passes at some point in the next few years.
Rumours persist of more societies that have loaned excessively on commercial properties and buy-to-let, particularly in the big cities where the market for new apartments has sunk. We have already seen other mutuals that have suffered from lending too much for commercial property development in a similar way, apparently, to the Dunfermline – this has undone Belfast’s Presbyterian Mutual Society and some credit unions in the Irish Republic.
Several other building societies – Barnsley, Derbyshire, Cheshire, Catholic and Scarborough – have also been rescued for various reasons, including exposure to Icelandic banks, over-lending at peak property prices and failing to exercise sufficient caution in their choice of customers. One of Spain’s caja mutual banks has also been rescued, another victim of a property price bubble. Meanwhile the Irish Nationwide Building Society is toppling down a cliff of likely insolvency following some bizarre business activities.
These failures do not destroy the argument that building societies and other mutuals are inherently better than banks and more resilient to current market conditions because of the conservatism imposed by structures that prevent high leveraging of debt. As the Financial Times observed after the Dunfermline failure: “mutuals have withstood the impact of the credit crunch much better than the listed banks”.
The positive claim for building societies is that they invest more sensibly and more sustainably than do mainstream banks. But some fell under the spell of the PLC banks and forgot their own strengths.
For Marxists, the terminology is ‘hegemony’ – capitalism won the battle of ideas and controlled the arena of thought, even though many capitalist financial products were ill-conceived. For psychologists and share traders, the description is the ‘herd instinct’ – following what others have done, assuming that the majority must be right.
The big challenge now is one, with a slightly different focus, being considered by the G20 leaders – what should be the regulatory landscape once the crisis over? World leaders are considering whether regulation should be global, continental or national; and what models of asset valuation should be used in accounting standards. But it is also important to review the shape of national banking markets and the role of mutuals within those.
One of the key facts that must be taken into account is that banks such as RBS and Citigroup grew so large that governments had to rescue them to protect the market system and to prevent a crash probably more massive than that of the Great Depression. Yet, paradoxically, the liabilities of those banks are so large that there are serious doubts as to whether governments have access to sufficient capital themselves to cover those liabilities.
We have reached a situation where the big banks were too big to fail. But they became so big that the governments are unable to do anything more than prevent a calamitous collapse. They are now in nowhere land, with the risk that they become ‘zombie banks’.
One response to this has been to merge banks together so that the more successful banks shield the less successful ones. So Lloyds TSB rescued Halifax Bank of Scotland, only for the whole new Lloyds Group to cease being viable without government support. It is a similar situation in the United States with the consolidation of some of the world’s largest banks rolled together into giant loss-making entities.
Equally, Spain’s Banco Santander first bought the healthy Abbey and then rescued the Alliance & Leicester and parts of the Bradford & Bingley. If, heaven help us, something rotten emerges within Santander we will then have another massive mess. The banking system is now like a giant snowball rolling down a mountain, collecting bits of toxic debris as it goes, polluting even what was sound.
We should therefore consider what the regulatory requirements should be in the future. It has surely become clear that a medium-term objective – and not just of banking regulation – is that no company should become so big that if it fails it must be rescued by a government.
That means that many of the largest banks should (after the crisis is over) be broken up into smaller operations. For this to happen there would need to be global agreement to cover global banks. But a banking sector comprising smaller financial institutions should be to the benefit and security of all the world’s governments.
There is one building society – the Nationwide – that would probably also need to be broken-up on this principle. But the stronger regulation would not impede the merger of CFS with the Britannia. Its enlarged business would be sufficiently spread across various financial products that it would probably not pose an anti-competitive threat.
It should also be recognised that mutuals have a special position in the market, because they operate at lower cost and at lower risk, so deserving of special protection. They can play a key role in ‘keeping the banks honest’ and to prevent consumers being over-charged. We should therefore consider how best to preserve the mutual sector as an important player in the financial system.
Stronger regulation to prevent the creation and continuation of excessively large, anti-competitive, banks (and other utilities) should be backed-up by new and strong regulation of the mutual sector – an Office for Mutual Regulation. Its primary roles would be to ensure that mutuals continue to operate in the public interest and provide a benchmark for the fair provision of services to consumers. One underpinning principle is that a mutual is for life, not just for a quick profit.
The OMR would have the power to intervene in a variety of stipulated circumstances. These might include a proposal to demutualise; unsustainable investment and lending policies; weaknesses in corporate governance. Hopefully, such a structure would have challenged the mistakes made by the Equitable, for example.
A mutual regulator could also play an important role in overseeing community interest companies (CICs), recognising the fear that the legal structure for CICs runs the risk of their manipulation for private gain.
There is, though, a strong argument for saying that it would be difficult at present to obtain Parliamentary time to introduce such a new measure. An alternative to a statutory regulator would be a voluntary one, with an endorsed ‘kitemark’ used by co-ops and mutuals to indicate their acceptance of an overseer. It might involve adherance to a British Standard (the British Standards Institution are the originators of the kitemark).
Even if there is not acceptance of this proposal, there should at least be a general recognition within our movement that the mutual sector has a problem (though on a much lesser scale than the rest of the financial system). As yet, none of the trading failures of mutuals reflects any weakness in the mutual model – just that various boards of directors have flouted their traditional methods of business in order to obtain higher levels of turnover and profit.
What we have is a failure of governance, not of mutuality. What we need is a solution to that failure of governance. Let us hope there is now a proper debate on how this can be achieved.