What is the legal difference between a Bank and a Building Society?ty

John_Pierpoint

Obviously a bank is owned by its shareholders, usually on a basis of one unit of currency buys one share of risk capital plus one vote.
For a building Society it tends to be one vote per first named investor (with a minimum £100 investment in a "share account").

However what defines "risk capital" in a building society. Does some of this risk capital (eg PIBS) carry a different class of votes to reflect the different class of risk ?

Does a Building Society have the ability to gear up its deposits into loans (typically at a ratio of up to 1 to 8) ?

In this era of "zombie" banks, we all need to understand the alternatives.

antrobus

John_Pierpoint wrote: »

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However what defines "risk capital" in a building society.

Ultimately the same EU directives (and therefore Basel rules) as define "risk capital" in a bank. What we commonly refer to as 'banks' and 'building societies' are merely different kinds of 'credit institutions', and the same rules apply to all 'credit institutions'.

John_Pierpoint wrote: »

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Does some of this risk capital (eg PIBS) carry a different class of votes to reflect the different class of risk ?

I don't think so.

As far as 'building societies are concerned their risk capital is mainly in the form of accumulated reserves i.e. historical profits. Which is why it would be very difficult, if not impossible, to establish a new building society.

John_Pierpoint wrote: »

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Does a Building Society have the ability to gear up its deposits into loans (typically at a ratio of up to 1 to 8) ?

Yes, that's how all credit institutions work. They borrow money from one person in order to lend it to another person. The so-called ability to 'gear up' deposits only exists because the authorities usually insist on imposing some limits on their ability to do so.

John_Pierpoint wrote: »

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In this era of "zombie" banks, we all need to understand the alternatives.

Quite so.

Thrugelmir

John_Pierpoint wrote: »

In this era of "zombie" banks, we all need to understand the alternatives.

Building Societies for all intents and purposes are co-operatives. So at least any profit is reinvested back to the benefit of its members. In the case of smaller societies the local community it serves as well.

Generali

Thrugelmir wrote: »

Building Societies for all intents and purposes are co-operatives. So at least any profit is reinvested back to the benefit of its members. In the case of smaller societies the local community it serves as well.

AIUI they are mutually owned rather than being co-ops. I have no idea what the difference is in law but I guess there is one hence the names.

Thrugelmir

Generali wrote: »

AIUI they are mutually owned rather than being co-ops. I have no idea what the difference is in law but I guess there is one hence the names.

Wrong choice of word on my part. With a building society you gain membership by virtue of being a customer. Whereas with a Co-Op it is by a owning a share.

John_Pierpoint

The critical thing is "can a building society lend out more than it borrows"; by packaging up its mortgages, and then selling them to a bank, I think they might be able to get a visitors pass to the casino, using short term money?

Generali

John_Pierpoint wrote: »

The critical thing is "can a building society lend out more than it borrows"; by packaging up its mortgages, and then selling them to a bank, I think they might be able to get a visitors pass to the casino, using short term money?

Building Societies can borrow in the money markets, that was a result of the Building Societies Act of 198x.

Building Societies can also securitize mortgages. Nationwide BS has securitized hundreds of millions in lending IIRC.

No bank or building society can lend more than it borrows as it has to keep reserves in hand. The idea that they can do that comes from misunderstanding fractional reserve banking.

Banks can lend more that the initial amount deposited in them, between them but the total value loans + reserves > total deposits otherwise the system is insolvent.

That is where I think the UK's banking system was in 2008 as total reserves value fell hugely.

Thrugelmir

John_Pierpoint wrote: »

The critical thing is "can a building society lend out more than it borrows"; by packaging up its mortgages, and then selling them to a bank, I think they might be able to get a visitors pass to the casino, using short term money?

Those that took excessive risk. Such as the Chelsea BS were swept up following the dark days of 2008.

Mary_Hartnell

Generali wrote: »

No bank or building society can lend more than it borrows as it has to keep reserves in hand. The idea that they can do that comes from misunderstanding fractional reserve banking.

Banks can lend more that the initial amount deposited in them, between them but the total value loans + reserves > total deposits otherwise the system is insolvent.

Yes but how does each bank do its bit in increasing the money supply?
Creating an every expanding system that suddenly deflates when the borrowers start to default ?

antrobus

Mary_Hartnell wrote: »

Yes but how does each bank do its bit in increasing the money supply?....

Each credit institution does its bit in increasing the money supply simply by providing credit. Depending, if course, on what definition of money you've decided upon in the first place.

Mary_Hartnell wrote: »

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Creating an every expanding system that suddenly deflates when the borrowers start to default ?

The challenge has always been to find governments that remember what happens when you allow credit to expand without restraint. However, the lure of cheap and plentiful credit is such that sooner or later the time will come when you hear someone utter the phrase 'it's different this time'.

BobQ

As I recall 20 years or so ago the main difference from the consumer's point of view was that the BS paid better interest rates to savers, although sometimes offered less competitive deals to borrowers, compared to a bank. This difference was I believe largely due to the fact that the BS was lending its customer's money.

Of course now everyone is happy to favour the borrower and let the saver take the hindmost