Building Societies in the Financial Services Industry

The UK financial services industry is undergoing a period of deep transformation, which affects all industry participants. This chapter reviews the impact of the global financial crisis on UK banking and discusses the events that lead to unprecedented government intervention and subsequent regulatory reforms. It also provides an overview of the changing structure of the UK banking and financial sectors. While UK banking is still dominated by few very large banking groups, the recent entrance of new banks has increased its competitive nature, particularly in the retail banking sector.

This chapter begins by recounting some of the main points in the building society sector’s development, then adds to the historical account by describing some of the more recent changes to arrive at the shape we have today. We focus in particular on the demutualisation process that saw the largest building societies becoming banks. We then assess the impact of the financial crisis on the sector; we analyse the consolidation process that took place as larger and more sound building societies took over troubled ones. The sector required little direct government support during the crisis, with the exception of the failure of the Dunfermline Building Society (DBS) in 2009.

Building societies are mutual financial institutions, owned by their members. They are also known as stakeholder-based financial institutions, and together with co-operatives and saving banks, form an important share of the financial sector in many countries. This chapter reviews the legal and regulatory framework with respect to building societies’ permissible activities and discusses recent developments. In addition, we consider the strengths and weaknesses of the building society model, with a particular focus on capital and governance.

This chapter presents an analysis of the key issues faced by building societies in today’s financial markets. We discuss the key changes in the structure of the industry and how these have impacted on margins and profitability and have resulted in restructuring and consolidation in the sector. Although banks and building societies broadly compete in the same markets and are subject to the same regulatory requirements, there are key differences in their business model. A building society’s customers are also its owners. Recent studies highlight a higher degree of customers’ satisfaction and trust in building societies compared to banks. This is also reflected in the lower amount of fines levied against societies for misconduct. While the overall outlook is positive, challenges remain, particularly arising from regulatory changes and financial innovation.

This chapter presents an empirical analysis of the performance of UK banks and building societies since the large-scale demutualisation process ended in the year 2000. Our results highlight the substantial impact of the financial crisis on the sector. Return on Equity (ROE) and Return on Assets (ROA) decreased for both groups in the wake of the financial turmoil, with 2008 and 2009 being particularly difficult years. However, as the UK economy recovers, the outlook is positive for both groups. Asset and loan growth are positive and the entry of new competitors seems to have had an encouraging effect on activity. Capitalisation ratios are above the regulatory guidelines and both groups are currently in a position to meet the regulatory minimum leverage ratio. Building societies in particular have recovered well from the financial turmoil, and they appear less risky than banks on a variety of measures, from lower volatility of earnings, lower volatility of net interest margins (NIMs), and higher z-scores.