View from City Road: Societies will have to pay up

If you can't beat them, buy them. That was the idea behind the surge of interest among banks in buying building societies. But enthusiasm is rapidly fading away again, and not just because Lloyds Bank's bid for Cheltenham & Gloucester has thrown up so many problems.

First, the societies themselves are growing stronger by the day. Halifax Building Society, the country's biggest, grew pre-tax profits by nearly a fifth in the first half even though the housing market remained flat on its back.

Second, the Treasury relaxed the rules to allow societies to compete still more strongly with banks in business lending, insurance and money market borrowing.

The result is that the whole idea of mutuality has been given a new lease of life. This has come as an unwelcome shock to the high street banks, especially those, such as TSB, interested in buying a society.

Peter Ellwood, chief executive of TSB, now thinks it much less likely than in the spring that his bank will buy a society. Other bank chiefs at Bank of Scotland and Royal Bank of Scotland have probably developed similar reservations.

The bankers' cry now, articulated by Peter Birch of Abbey National on Tuesday, is that if building societies are to be granted the privileges of plc status they should also shoulder the responsibilities of public accountability.

The favoured method was suggested by the Building Societies Commission itself, and is to make societies pay dividends to their members in the same way as plcs reward shareholders.

Banks worry about the advantage societies gain from ploughing back to reserves the earnings plcs have to pay out in dividends. That would be all very well, they say, if the societies were under the same pressure as banks to deliver value to shareholders. But they are not, and can afford to take a cavalier view of return on capital and undercut their rivals.

If they pay dividends to members, inefficient society managements will be able to pay out less than their more effective rivals. Irate customers might start using their powers to change the board. Far more likely, they will vote with their feet by moving their accounts, which sends another useful signal to the board.

The Treasury is expected to publish further details of its review of building societies in October, focusing on accountability. Building society dividends would be one way to make progress.

Banks may come to regret promoting the idea, though. Dividend payments could make societies even more competitive on the high streets than they are now.