Building Societies, MPs and the Rock Crisis

baby_boomer · 15 September 2007 at 2:13PM

All members of this forum should be aware that building societies have successfully bullied MPs to allow building societies to behave more like Northern Rock

.

Forget the MPs like LibDem spokesman Vincent Cable who says the NR crisis is because of the Rock's risky lending. It is not. It is because the Rock lends far more than it takes from savers in the retail savings market.

MPs, led by the local Portman BS MP, Sir John Butterfill, changed legislation which had insisted the building societies can only lend twice the amount they take from savers. In future they will be able to lend more than three times that amount :eek:

This was one of the regulations which both determined the character of mutual societies (controlled by members and not by those who lent them money) and also provided the financial system with a bit more stability.

How stupid and ignorant can our MPs get, even allowing for the fact that few are financially literate?

Today's papers published tables of companies that had much bigger loan books than savings' books as a guide to where the next casualty to NR might come.

As well as Portman & the BSA, Britannia BS had long been lobbying for this change.

What is behind it? Ambitious and short sighted building society bosses who want to build up their salary packages on the back of an expansion programme outside their usual sphere of influence e.g. into commercial lending & sub-prime lending.

baby_boomer · 17 September 2007 at 9:23PM

Hansard link - Here's the parliamentary justification for the bill that has relaxed the societies funding limits and increased the risk to savers down the line

It even quotes Northern Rock in support of the relaxation!
See page 9 where it is suggested that borrowing in the wholesale market - rather than from retail savers - is cheaper, which put societies at a disadvantage compared to the Rock.

The other "justification" is that it could revive that old David Miles / Gordon Brown red herring, of long term fixed rate mortgages :rolleyes: - discredited by most industry commentators.

And here is the pompous Adrian Bailey (Labour), supporting the Conservative Butterfill

"Building societies have the advantage of having trusted brand names, and because of their historical root in local communities, they are well known and understand the communities that they serve. By passing this legislation and removing the wholesale funding restraint, or at least modifying it so that building societies can borrow more money, we will enable building societies to produce products that are even better tailored and suited to the needs of their local communities."

Utter cobblers.

The road to hell was paved with good intentions :rolleyes:

dwsjarcmcd · 17 September 2007 at 10:28PM

While the bill may allow for greater funding from the wholesales markets, the building societies still have much less exposure to them than banks - typically 25% in the case of the likes of Natiowide and Yorkshire.

Do you really think the 'bosses' of whom you speak would exercise their option to raise their wholesale funding in the forseeable future. Don't think so somehow

baby_boomer · 18 September 2007 at 6:05PM

Of course they won't do so now that wholesale money costs more than the retail market. I didn't suggest they would be daft overnight and commit hari kari now this crisis has shown them the risks.

But those circumstances won't last forever. The point is that they can get greater funding from the wholesale markets in future. Our MPs may have contributed unnecessarily to a future crisis in another decade.

And why potentially undermine a more stable part of the financial sector

?

Britannia BS wouldn't have bothered to take over Bristol & West Savings accounts last year (at a heavy premium to the market rate) if the current legislation had been in place. It only took over B&W savings because the way it was going meant it was on the brink of breaching the previous funding rules for mutual building societies.

Even with this takeover of B&W savings, Britannia BS was on a table, level with LLoyds Bank, composed by one newspaper of institutions whose mortgage lending was most exposed to wholesale funding.

Does anyone have a link?

baby_boomer · 18 September 2007 at 7:39PM

When asked in the last week by the Sun, Scarborough BS wanted to turn back the legislative clock as it sought to reassure its savers:

"“Our structure is completely different and we are not affected in the same way by changes in market conditions. This is because 90 per cent of our funding comes from individual savers, which means that our borrowing from the money markets is low compared to many other institutions. By law, at least 50 per cent of our funding has to be from individual savers, unlike banks which do not have this constraint.”

## - This is technically correct, as Butterfill's legislation is not quite on the Statute Book, but has been considered for amendment by the House of Lords.

Building Societies, MPs and the Rock Crisis

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