I’m sure many readers of this blog made good money out of the building society demutualization process. I can remember busily opening building society accounts all over the place in the hope of ending up with a share allocation. From memory my best deal ever was in the Leicester Building Society – I come from the village next door to the society’s old Narborough head office – which turned into the Alliance and Leicester Building Society. While it lasted this spree of demutualizations was enormous fun and paid for a few second-hand cars. In a sense, it was the last chapter of the great Thatcherite privatization bonanza.
But was it the right thing for the UK? I can remember the debate at the time. Building Societies allegedly lacked scale and needed access to the public wholesale markets to survive. Small was not beautiful and we convinced ourselves that the public markets held the key to growth. Except that that wasn’t true. More than a few building societies have continued to have issues but most of the survivors, not least the Nationwide, have prospered. There doesn’t seem to have been any obvious advantage in the last decade to being a publicly listed business.
On a parallel path, a vibrant debate has opened up about the excessive centralization (in London) of the UK’s. I’m thrilled that more and more pundits are actively discussing moving the capital of the UK away from London. One of the few good ideas coming out of McDonnell’s Labour is a push back on the excessive central control of monetary policy in London, in the Bank of England. MPs of all parties, and especially in England, are now pushing back on the centralization of power in London and strangulation of local government that started with Thatcher. Left and right wing think tanks are now aggressively punting new ideas about decentralization and giving more power back to local authorities. This all for the good in my book. England, in particular, has become a hostage of London and the Brexit debate has sparked a vivid debate about giving ‘left behind’ areas more power to manage their own destiny.
Which brings us local financial institutions. One idea that is being discussed in much more detail – especially by economists such as Paul Collier in Oxford – is that financial institutions matter greatly in the local ecology of a region. Globalized institutions tend to be less mindful of the local impact of their big decisions whereas there is growing evidence that local institutions take much more care about preserving the local ecosystem of suppliers and customers. Removing head offices for banks and building societies and plonking them all in London may make financial sense for the new shareholders but for the communities left behind the prognosis is usually grim. These once proud head offices become branch offices or processing centres and then comes the next wave of rationalization, they’re closed.
Economists such as Collier argue for rebuilding local resilience by either establishing or reinforcing existing local financial institutions. In effect, they are asking for a new version of the localized bank with some local development functions roles thrown in. And there’s also the issue of mutual control. In the 90s pure red-blooded capitalism was in and mutualism was frowned on. The enormous success of Nationwide and Vanguard (and of course John Lewis) shows us that mutuals have a big role to play in modern capitalism. They can be exemplars of long-term thinking assuming they aren’t captured by local cliques and managers who then milk the institution for local rents. They can also keep margins thin, and cut costs to consumers.
So in sum, might we have to reinvent the local building society? Might a future government rethink regional policy and focus instead on encouraging local community banks and mutuals to fill the gap in the financial ecosystem – and help weaken our over-dependence on London as a financial centre.