Building societies are to be given the freedom to make unsecured loans to companies; to buy up general insurance companies lock, stock and barrel; and to make deeper forays into the dangerous jungle of the wholesale money markets.
They insist these added freedoms will be good for their members, the ordinary savers and borrowers who (in theory, at least) own the societies. Quite why is a bit of a mystery. The last time societies were let off the leash was after the Building Societies Act of 1986, which allowed them to lend to property developers and to own estate agencies.
Almost all of them took advantage of their new powers, ploughing tens of millions into office developments just as the market was turning down. And there was barely a Top 10 society that didn't rush out to buy an estate agency chain, again paying top whack for businesses that were to prove worse than worthless when the domestic property boom fizzled out.
It was an unthinking, sheep-like flood, with losses and write-offs running into hundreds of millions of pounds. And it looks destined to repeat itself.
The new freedom to make unsecured loans to companies could mean profound changes for the industry. Under the new rules, societies can put up to 15 per cent of their assets into commercial lending. The Halifax alone, say, could steer pounds 11 2 bn a year into corporate lending, eventually devoting up to pounds 14bn to this area.
Companies, especially small firms, complain they are badly served by existing providers of loan finance - mainly the high-street banks. This is bound to encourage societies to dip a toe in the water. And when a building society dips, it tends to get its foot bitten off.
Deregulating any area of lending is fraught with risk. New entrants to the market forget that existing providers of capital have already snapped up the good risks. When Australia opened itself up to foreign banks in 1985, everyone assumed the worldly British and American bankers would make mincemeat of the previously cosseted Aussies. The opposite happened. The foreign banks rushed in determined to lend money, and did so, throwing cash at every larrikin, crook and opportunist who asked.
Building societies are doubly handicapped. They have little experience of evaluating corporate risk. The mechanistic credit scoring procedures they run on individuals cannot be used to assess loans to companies.
The newly won freedom to own insurance companies is also bound to be a temptation. But general insurance - rather like estate agency - is a risky and cyclical business.
The societies talk blithely of how they must be 'free to compete'. That often means free to throw their members' reserves into madcap forms of diversification or foist on them products they can buy cheaper elsewhere. The truth is that the best societies - in terms of competitive savings and mortgage products and the accumulation of reserves - are those that have stuck resolutely to the knitting.Reuse content