As the Yorkshire Building Society is about to take over the Chelsea Building Society I thought it would be worth taking a look at what is happening in the mutual building society sector in the UK.
Just to explain the term, mutual refers to a financial institution where the savers and borrowers actually own the capital of the business and no shareholders exist. The organisation is run for the benefit of its members and not shareholders.
The current economic climate and the continuing fallout from the “credit crunch” is forcing some of the smaller societies and some of the not so small building societies to seek the help of larger more stable institutions to ensure they are protecting the interests of their members.
There have been a number of high profile rescues by the Nationwide Building Society, the UK’s largest mutual society in the last 12 months. They have had to step in to rescue the Cheshire, the Derbyshire and the Dunfermline Building Societies.
It appears this trend is set to continue as smaller societies struggle to cope with the current trading environment. However, it is not just the smaller societies that are struggling, earlier this year the West Bromwich Building Society, the 5th or 6th biggest mutual in the UK had to approach the Financial Services Authority regarding its ability to continue trading.
Such were the problems there, the FSA agreed to invent a new type of share to allow the institution to borrow funds and stabilise its balance sheet. A move that many in the mutual building society sector disapproved of as it meant that there was now a layer of investors above the members (the savers and borrowers) which goes against the ethos of mutuality.
In the last year the number of building societies has shrunk from 59 in 2008 to 52 in 2009 and it is inevitable that this number will reduce further in 2010.
The Government and the FSA are said to favour the idea of having 4 or 5 major building societies referred to as “sector champions”, who are able to compete with the large banks. While the smaller societies of which there are many resort to lending at a local level.
Looking at the current assets and customer bases of the larger building societies these “Sector Champions” are likely to be:
o Nationwide Building Society
o Britannia Building Society
o Yorkshire Building Society
o Skipton Building Society
o Leeds Building Society
o West Bromwich Building Society
My own opinion on this is that it is “pie in the sky” thinking as the modern world does not operate on a local level and most of the smaller societies will have to merge or die. Therefore the best course of action for all concerned would be to merge into about a dozen or so building societies that would be capable of offering competitive products and could enjoy the economies of scale required in the new trading environment.
Either way, over the next twelve months there will be massive changes in the sector and many of the smaller societies will be absorbed by larger societies.