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Converting Failed Financial Institutions into Mutual Organisations 

by: Michie, Jonathan; Llewellyn, David T.; Anderson, David; Eyre, Nick; Hunt, Peter; Mills, Chris; Palmer, Jeremy
Source: Kellogg College, University of Oxford 

In the wake of the financial crisis, the government's proposals to reinvigorate competition in the banking sector include supporting competition and choice through diversity, most importantly through maintaining a strong mutually-owned financial sector. This reflects a consensus across the major political parties for diversity of corporate form within financial services, with a strong mutual sector. The cross-party support for the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 had already demonstrated this broad political consensus. The case has become even more compelling given the performance of the private banking sector since 2007. In this context, there are three key reasons for creating an enhanced role for mutual building societies:

i. The ownership structure, regulation and traditional business model of mutual building societies (particularly the dominance of retail funding) makes them less prone to risky speculative activity than is the case with shareholder-owned banks;
ii. A mixed system of different corporate structures is likely to produce a more stable financial system; and
iii. A larger critical mass of mutuals is likely to enhance competition in the financial system.

The immediate issue is whether the failed financial institutions that were taken into public ownership -- most obviously Northern Rock -- could be re-launched as mutuals rather than as plcs. Should these former mutuals, which were demutualised to the personal financial gain of some, but at a cost to the taxpayers who subsequently bailed out the failed banks, be remutualised? This would pose logistical challenges. Before consideration is given to such issues, it is necessary to consider the strength of the case for such a remutualisation bearing in mind that Northern Rock has a formal commitment to repay Government loans of £14.5 billion, quite apart from any realisation of the public investment in its capital.


Details

Link: None
Publication Date: 2009-09-01
Pages: 41