On the main issue of wholesale funding, the building societies have got everything they asked for. Clearing banks have made enormous gains in the mortgage market at the expense of the societies largely because of their unlimited access to money markets.
The clearers can borrow at fixed rates from other banks, allowing them to match their borrowing to their lending with precision. This substantially reduces risk even if all mortgages are fixed rate. With their limited access to the money markets, societies have plainly been put at a competitive disadvantage.
Financing long-term fixed rate mortgages with short-term variable rate deposits from branch customers would lead to catastrophe were interest rates to rise substantially.
Giving building societies greater access to the money markets, therefore, seems entirely reasonable. Markets have in any case long operated a 'glass ceiling' well below the formal limits. Any society that gets too near official limits tends to be regarded as suspect and is likely to pay penal interest rates. The Building Societies Commission acts as a further safeguard since it approves funding limits for each society, often well below the legal maximum.
The more important long-term change is the freedom to lend to small businesses. Mr Nelson draws parallels with the success of regional banks in other countries, such as Germany. He believes the closeness of building society managers to their local customers will help them to avoid the errors made by NatWest and others in the late 1980s.
Provided the learning experience is not too painful, wider sources of credit for small business plainly make sense by both increasing competition and providing a reassuring alternative to the much distrusted banks.
Of the other concessions, the freedom to own general insurance companies looks less compelling. Sir Bryan Carsberg, Director-General of Fair Trading, may have something to say about a policy that makes it even more attractive for societies to stuff expensive home insurance down mortgage customers' throats.
Taken together, the Treasury proposals nevertheless make reasonable commercial sense. The concern is that in practice the reforms will prove the thin end of the wedge, allowing big societies to become banks in all but name. As mutuals, societies lack the disciplines and accountability of the joint stock banks. Allowing them to go the whole hog under present structures of supervision and ownership would be wrong.
Luckily Mr Nelson has grasped the point. Rightly, he is making increased accountability a condition of further freedoms for societies. The second stage of the review should tell those with full-scale banking ambitions to convert to plc status first.Reuse content