Remutalising the Rock is a backwards step

4 March 2010

In brief, they want to the government to make Northern Rock Bank a building society again. It seems that they have conveniently forgotten that as a building society it wasn’t exactly a paragon of all the mutual virtues as a long running Mail on Sunday campaign at the time testifies.

As I recall, among its many misdemeanours it had a reputation for offering very attractive mortgage deals and then changing  the terms retrospectively and adding on swinging exit fees.

Move the clock forward to 2009/10, and rationalisation in the sector suggests that the building society model doesn’t look too worthy of emulation. Obviously I’m not putting today’s societies in the same boat as Northern Rock circa 1995 but one increased its standard variable rate (SVR) from 3.5% to 4.95% from yesterday, while at the same time trimming its offering to savers.

Others have been more circumspect in their adjustments but all in all it suggests that mutuality is looking a little one sided right now and there’s not that much in it for members.

Of course one shouldn’t judge a church by the priesthood and some building societies are doing better than others while others are doing quite well looking after themselves.

And it is also possible to argue that the building society model is looking vulnerable at the moment because of the low interest rate environment and it is this, together with unfair competition from the state backed banks, that is making life so difficult for them but that doesn’t exactly help their customers.

In other words, unless the interest rate regime changes dramatically, Cable’s assertion that there’s a strong case for the remutualisation of Northern Rock, doesn’t really stack up.

Indeed, there may be as he says, “a case for a more varied banking ecology” but right now building societies don’t provide “a different and, for many, more attractive business model”. True, there may be no pressures to produce shareholder returns but the pressures on their balance sheets are no less real and perhaps some might say unwarranted.

But what is really fascinating is the reason Cable gives for his original objection to the mutualisation of national banks and what has made him change his mind.

“Our objection has been that mutualisation of the nationalised banks does not produce the return of cash to the taxpayer”, he says, “but we must remember Northern Rock is in a very different situation to Lloyds and RBS. £23bn of government money has been pumped into Northern Rock vastly in excess of its market worth even at the height of the credit boom. There is no way this money will ever be recouped purely from a re-flotation.”

If that is the case, why wasn’t the Rock just put in mothballs like the steel industry in Redcar and why should Northern Rock customers pick up the tab for putting the clock back? As Cable points out, but not quite in these words, they’ll be the ones who will have to pay back the tax payer over time and given the current problems of the sector that could be pretty difficult.