James Moore: Solution needed for this mutual funding crisis

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The Independent Online

For the past few years, any building society facing hard times has had a readily available solution – call on a larger rival, usually Nationwide.

The latter is no longer an option. Nationwide has come to the rescue of three smaller rivals. But with savage competition for deposits, margins at all-time lows and the Financial Services Authority (FSA) demanding that societies hold more capital, it can no longer prop up the sector. A mutual's first duty has to be its own members, otherwise the concept fails.

It is likely that others will have taken a similar view. The next four biggest societies have all completed at least one merger during the past few years, usually with rivals that have been struggling.

The more ambitious among them would love to do deals. The problem is, none of them are immune from the chill of the prevailing economic climate or the FSA's calls for more capital, which leaves the minnows in a bit of a jam. It is a dilemma that even the Bank of England seems to have been struggling with. Beyond mergers (no longer an option with the big boys out of the game), its best suggestions are shrinking one's business or joining forces with other societies by forming collectives to help cut costs, or perhaps approaching the bond markets. Mutual building societies don't have the option of tapping investors for more cash through devices such as rights issues. Step forward JC Flowers. It will provide up £50m to own 49 per cent of a new holding company that Kent Reliance Building Society will use to expand and, possibly, take over rivals.

No dividends will be taken out, but there will be an agreed return and an exit in a few years' time. Allowing a private equity firm run by a former Goldman Sachs banker into the sector might look unpalatable and JC's reputation is hardly whiter than white.

But this might prove to be a sort of "least worst option" because building societies have never been more relevant. Banking needs competition and building societies should be able provide that.