David Prosser: Happy to be banking in the red

Outlook: Neither the mutual nor the banking sector has the right model for success all the time
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The Independent Online

So farewell then, Abbey and Bradford & Bingley. By the end of the month, their Spanish parent company, Santander, will have dumped both their brands in favour of its own identity, with Alliance & Leicester due to get the same treatment later this year.

All three institutions have something in common other than their new name: they were among the leading lights of the building society demutualisation craze of the Eighties and Nineties, a trend which saw a string of well-known high-street providers turn their backs on centuries of success in the mutual sector in favour of the excitement of banking and the additional returns it promised.

There has not been a happy ending to the story. In addition to this trio – which have all, for one reason or another, failed to forge a prosperous, independent future – you can add the names of Northern Rock and Halifax to the list of building societies whose members voted in favour of cash or share windfalls when asked to back conversion to banking status. None of the former mutually-owned institutions made it through the crisis standing on their own two feet.

Are building societies inherently safer than their banking rivals? In short, the answer is yes: there are more restrictions on their activities, which prevents them moving up the risk/return line, and no pressure from shareholders to indulge in more risky behaviour in order to drive up gearing. There have, of course, been notable failures in the building society sector, but by and large it is an industry that has escaped the worst of the financial crisis.

To this group of remarkable survivors, one might add Santander itself. The Spanish government has been less inclined to leave banks to their own devices – it labours under similar restrictions to British mutuals, in fact – and the bank has emerged from the credit crisis (and, in some ways even more impressively, the devastating collapse in the Spanish property market) seemingly unscathed.

In this sense, Abbey, B&B and A&L have been fortunate in their acquirer. And despite the fears of some analysts about the extent of this amalgamation – Santander is now number two in mortgages and number three in retail banking – and its implications for competition, customers seem to be benefiting, too. Independent personal finance analysts say the current accounts and mortgages on offer from Alliance & Leicester and Abbey have improved significantly since Santander acquired them (indeed, A&L is now ranked Britain's most competitive home loan provider).

Even so, you will hear more about those competition anxieties if – and when – Santander enters the bidding for banking assets being sold off by the institution in which the Government has taken big stakes.

It is not yet clear what Santander will be allowed to bid for – the idea is supposed to be that the eventual sell-off of these assets helps to encourage new entrants to the banking sector – but it said yesterday that it was eyeing the opportunities.

It may be that the bank believes the Government will find it impossible to keep it out of the auction of state banking assets, or even that it has already been given a green light to bid. But either way, we shouldn't get overly concerned. Potential new entrants to British banking's premier division include Tesco, Virgin Money and National Australia Bank. All may have something to offer, but Santander already has a track record of offering strong competition to Barclays, Lloyds, HSBC and Royal Bank of Scotland, which once stood together as an impregnable big four of banking. We shouldn't stand in the way of it continuing to do so.

None of this is to say it is not sad that three historic names from Britain's financial services industry are now set to disappear for good, though none of them are held in the anything like the regard they once were. Nor should we see either the mutual or the banking sectors as necessarily always having the right model for success.

The lesson from Spain is rather that conservatism in banking ultimately has its rewards. Santander is one of the few genuine winners from the credit crunch for that reason. We'll see now what it does with its newly united brand. Customers of Abbey, Alliance & Leicester and Bradford & Bingley, though, will be better off under their current management than under the leaders who thought demutualisation was their golden ticket.