Building society
They exist in the United Kingdom, Australia and New Zealand, and formerly in Ireland and several Commonwealth countries, including South Africa as mutual banks.
[1] They are similar to credit unions, but rather than promoting thrift and offering unsecured and business loans, the purpose of a building society is to provide home mortgages to members.
Borrowers and depositors are society members, setting policy and appointing directors on a one-member, one-vote basis.
Building societies often provide other retail banking services, such as current accounts, credit cards and personal loans.
In the United Kingdom, building societies compete with banks for most consumer banking services, especially mortgage lending and savings accounts, and regulations permit up to half of their lending to be funded by debt to non-members, allowing societies to access wholesale bond and money markets to fund mortgages.
Building societies as an institution began in late-18th century Birmingham – a town which was undergoing rapid economic and physical expansion driven by a multiplicity of small metalworking firms, whose many highly skilled and prosperous owners readily invested in property.
[10] The number of societies in the UK fell by four during 2008 due to a series of mergers brought about, to a large extent, by the consequences of the financial crisis of 2007–2008.
Thus permanent building societies quickly became mortgage banks and in such institutions there always existed a conflict of interest between borrowers and savers.
Conflict of interest between savers and borrowers was never fully reconciled in the building societies but upon deregulation that reconciliation became something of a lost cause.
The management of building societies apparently could expend considerable time and resources (which belonged the organisation) planning their effective capture—of as much of the assets as they could.
(Tayler 2003) Management promoting demutualisation also thereby met managerial objectives because the end of mutuality brought joint stock company (plc) style remuneration committee pay standards and share options.
Their benefit is in the right to purchase the new stock, which are valuable because the new issues are consistently underpriced [referring to USA mutual bank conversions].
Moreover, by no means are all mutual managers incompetent, and conversions allows the bank to expand more easily and to grant executive stock options that are valuable to skilled managers".Instead of deploying their margin advantage as a defence of mutuality, around 1980 building societies began setting mortgage rates with reference to market clearing levels.
This behaviour resulted in a return on assets for building societies which was at least as high as Plc banks and, in the absence of distribution, led to rapid accumulation of reserves".As Boxall & Gallagher (1997) also observe: "... accumulation of reserves in the early-1990s, beyond regulatory and future growth requirements, is difficult to reconcile with conventional theories of mutual behaviour".Llewellyn (1996) draws a rather more direct and cynical conclusion: By adopting a policy of building up reserves by maintaining an excess margin, building societies simultaneously allowed banks to compete and may have undermined the long run viability of mutuality.
A more cynical approach is that some societies may have adopted an excess-margin strategy simply to enhance their value for conversion.Some of these managements ended up in dispute with their own members.
The method usually adopted were membership rules to ensure that anyone newly joining a society would, for the first few years, be unable to get any profit out of a demutualisation.
The amended terms allowed former members of multiple societies which merge into one to maintain multiple entitlements to FSCS protection until 30 September 2009 (later extended to 30 December 2010), so (for example) a member with £50,000 in each of Nationwide, Cheshire and Derbyshire at the time of the respective mergers would retain £150,000 of FSCS protection for their funds in the merged Nationwide.
[16][17] By 2008, every building society that floated on the stock market in the wave of demutualisations of the 1980s and 1990s had either been sold to a conventional bank, or been nationalised.
[17] The following is an incomplete list of building societies in the United Kingdom that no longer exist independently, since they either merged with or were taken over by other organisations.
Following the end of World War II, the terminating model was revived to fund returning servicemen's need for new houses.
Eventually many of the smaller building societies disappeared, while some of the largest (such as Advance and St George) attained the status of banks.
In other countries there are mutual organisations similar to building societies: Because most building societies were not direct members of the UK clearing system, it was common for them to use a roll number to identify accounts rather than to allocate a six-digit sort-code and eight-digit account number to the BACS standards.
