Mutualising banks is essential to avoid future bailouts


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4:34 pm - September 6th 2011

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conribution by Daniel Carey-Dawes

The government has shown its true colours with its announcement that it intends to sell off Northern Rock to the highest bidder (most likely Virgin Money), without properly considering re-mutualisation for the failed bank.

Gone is any pretence about a desire to support the mutual sector, along with the previously stated commitment for a more diverse financial sector. The Conservative-led government has systematically failed to seriously consider a mutual option for Northern Rock and now wants to proceed with a policy that is more risky in the long term than a mutual model.

The Co-operative Party’s case for a mutual future for Northern Rock should be re-examined by the Chancellor, as it is crucial that taxpayers are protected from future bail-outs.

The case for re-mutualisation is strong. During the 2008 crisis building societies weathered the storm better than plc banks. Many of the shareholder owned banks had once been successful mutual institutions, but were demutualised as a consequence of the Tory 1986 Building Societies Act.

As a result of the Act a total of ten institutions demutualised and became stand-alone banks. Within twelve years of demutualisation, six became part of entities in receipt of government support and three have been consumed by other banks.

The market judged the mid-sized mortgage bank a failure, whilst building societies performed soundly through the crisis. That is why we are calling for Northern Rock to be returned as a building society.

Labour committed to re-mutualisation in the 2010 General Election manifesto. George Osborne has not been clear with taxpayers about the future of the bank they collectively own. The Co-operative Party is calling on the government to demonstrate that they have seriously considered the case for re-mutualisation.

A recent UKFI report suggested that the Treasury has not properly considered the case for re-mutualisation. The report stated that turning the Rock back into a mutual would involve ‘gifting’ the bank to customers, at a great loss to tax payers. Those involved with financial mutuals would find this language very strange. Building societies are not based on principles of ‘gifting’ – they are built on member economic participation.

The Co-operative Party’s model for re-mutualisation would raise hundreds of millions for tax payers, as members of the new mutual would raise subordinated debt from the bond markets.
The government has an immense responsibility to get the best deal for the taxpayer and frequently claims that a sell off would be in their best interests.

The reality is the government is taking a huge risk with the taxpayer’s investment. The best outcome for the taxpayer would be never to have to suffer a re-run of the banking crisis in the future. Failure to re-mutualise the Rock now leaves the banking system open to further instability.

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The Co-operative Party is petitioning George Osborne to halt the sale of Northern Rock and re-examine the case for re-mutualisation.

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Reader comments


1. pjt

How is mutualization ensuring that bail-outs are not needed? Where I live, Finland, there was a huge bank crisis requiring bail-outs in 1990′s, and the majority of bail-out money went to mutuals. Commercial banks also needed support in the huge recession, but they paid it back., and at some point the government even made a profit. The mutuals were a sink.

You may have an ideological preference for mutuals and co-operatives, or you may be advocating some business because you have vested interests. I’m quite suspicious of mutuals, based on the track record here.

2. theophrastus

What matters is how financial institutions are regulated, not what their form of ownership is. Inappropriately regulated mutuals could cause a financial crisis, too, if they were dominant in the financial sector.

3. Tim Worstall

“The Co-operative Party’s model for re-mutualisation would raise hundreds of millions for tax payers, as members of the new mutual would raise subordinated debt from the bond markets.”

Is this more or less than would be raised by selling N Rock?

If less, then this is a gift to the new mutual owners, isn’t it? If more then great, have it with my blessing (not that that matters but….)

4. Richard W

I agree with the OP that it would make more sense for the re-mutualisation of Northern Rock. They can’t make it as a standalone entity in the private sector because mid-sized banks can’t survive in the UK banking system. Every demutualised building society that became a bank 1989-2000 was bought by a larger bank or nationalised. That was not just a freak coincidence, but in fact was a consequence of requiring scale to make money in the UK High St. banking sector if you are operating in the private sector. There could be for some time an illusion of success for the mid-sized. However, they will be sitting on considerable risks that will eventually sink them. The mid-size bank as a plc is inherently risky and vulnerable through their reliance for funding on the interbank market. The mid-sized bank just do not have the scale to make the returns that shareholders are looking for without assuming too much risk. What works in the UK market is large universal banks and a healthy mutual sector.

Selling them to someone like Virgin is possibly a way to get around the problem if Virgin have designs on becoming a large bank. Moreover, Virgin are not listed so it is really like a private equity deal. Ultimately, I suspect the thinking of not re-mutualising is because the government are trying to create more large banks.

5. Leon Wolfson

@3 – Why should profit be the only consideration? That’s how we got here in the first place. Why is learning from history taboo?

6. AnotherTom

“The case for re-mutualisation is strong. During the 2008 crisis building societies weathered the storm better than plc banks”

This is just an assertion rather than facts. Look at Norwich & Peterborough – mis-selling led to “merger” with Yorkshire BS or Kent Reliance – massive growth and then rescued by private equity … I could go on!

If you can show mutuals’ form of ownership is somehow superior, please do. Because you’re asking for taxpayers to receive hundreds of millions of pounds less for their bailout of NR.

7. ukliberty

@3 – Why should profit be the only consideration?

Tim’s point was about value for money for the public purse.

8. Tim J

6 – Or the Dunfermline and Scarborough building societies.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Mutualising banks is essential to avoid future bailouts http://t.co/VOFG1Xg

  2. Liberal Conspiracy

    Mutualising banks is essential to avoid future bailouts http://t.co/VOFG1Xg

  3. neilrfoster

    Mutualising banks is essential to avoid future bailouts http://t.co/VOFG1Xg

  4. neilrfoster

    Mutualising banks is essential to avoid future bailouts http://t.co/VOFG1Xg

  5. Alex Braithwaite

    Mutualising banks is essential to avoid future bailouts http://t.co/VOFG1Xg

  6. Richard Kermode

    Mutualising banks is essential to avoid future bailouts http://t.co/VOFG1Xg

  7. Northern TUC

    Mutualising banks is essential to avoid future bailouts http://t.co/VOFG1Xg

  8. Pete Jefferys

    @dancareydawes write about why mutual banking would help avoid another bailout @coopparty http://t.co/xIJdtpY

  9. Joe Russo

    RT @dancareydawes My piece for @libcon on Northern Rock and mutualism: http://t.co/Fm7wqbC #CoopParty

  10. Faronomics

    Mutualising #banks is essential to avoid future bailouts http://t.co/CUffAXE

  11. Lee Hyde

    "Mutualising banks is essential to avoid future bailouts" via @LibCon http://t.co/3KOnKo4 << I never believed the @Conservatives re mutuals

  12. Darling scuppers Miliband’s best line of attack, back and forth debates over the 50p tax rates, and more concern over the future of the NHS: round up of political blogs for 3-9 September | British Politics and Policy at LSE

    [...] Left Foot Forward notes that this is the slowest recovery since the great depression. Daniel Carey-Dawes at Liberal Conspiracy suggests that mutualising the banks is the best way to prevent future bail-outs. [...]

  13. Daniel Carey-Dawes

    And the campaign for remutualisation continued apace in 2011: http://t.co/9klRTvuA





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