Demutualisation

Demutualisation. There's been a heated debate over whether financial institutions such as building societies ought to convert into banks.

The typical arguments put forward in favour of converting are :

Extra capital can be raised at the time of conversation for expansion and investment in the business.

The building society structure does 'not fit' with modern financial retailing - fund raising in the money markets is easier as a bank without the organisation having to satisfy restrictions imposed by the Building Societies Act. This for example stipulates that 75% of the business must come from the residential mortgage market and 50% of funding must be taken by from savers with the remainder coming from the money markets, if desired.

Customers and shareholders can receive a better deal by a leaner, more efficient organisation which faces the discipline of the financial markets.

Some have suggested societies are driven towards conversion because it's 'the macho thing to do' and because boardroom salaries can rise to the levels seen in comparable stockmarket quoted businesses.

The arguments put forward against converting are typically:

The organisation can thrive by looking after its customers who are often also members without having to worry about shareholders demanding ever increasing dividends.

The society can take a long term view without having to the discipline of the financial markets which tend to demand greater and greater operational efficiency and rising profits.

There's no need to convert into a bank to have greater flexibility to raise funds in the money markets. Recent rule relaxations to the Building Societies Act mean societies can now raise up to 50% of their mortgage funds from wholesale market. This is said to be adequate given that most societies are currently borrowing less than 30%.

See also building society and mutual society.

Last Updated: June 2007 © Moneyextra.com

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