Capital idea that makes mutuals appear clueless
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Proposing that societies raise capital plays into the hands of their enemies by making them seem weak
THE MUTUAL CRUSADER
If building societies were to adopt Mutual Ordinary Deferred Shares to bring some much-needed relief to their bottom line the sector would be taking a giant backward step.
At a stroke it would send us hurtling towards ground traditionally occupied by plcs - the sort of territory that has cost us dear in the past.
One unintended consequence of the MODS proposal is that it paints a picture of societies not having a clue what to do in times of trouble, which is far from the true position. In fact, we’ve got some good ideas.
But we have a government and regulator more interested in meting out populist measures than initiatives that could work for the benefit of all.
If mutuals start raising capital where will that leave them? Who will decide how much is enough capital and will the Financial Services Authority, in its infinite wisdom, force societies to hold more and more?
The regulatory perspective would be that the more capital societies hold the safer they must be. After all, they’re doing it for liquidity so why shouldn’t they do it for capital too?
But to take this attitude would be to treat the symptom rather than the cause.
If societies can’t make enough to build reserves they should either give up the ghost or cut costs
If societies cannot make enough profit this seems like a simple way out but it is not a long-term solution.
It must seem to outsiders that we don’t know how to make the mutuality model work so instead of sorting the problem we’re trying to find a workaround solution.
And if societies have to start raising capital like this what’s to stop banks and plcs including Tesco from maintaining that societies don’t have a long-term mutual future?
They could argue that mutuals should not have any protection from the real world if they don’t act like mutuals.
So to me, proposing MODS plays into the hands of our enemies because if we start raising capital by issuing some form of bonds, how can we claim to be truly mutual?
But there’s a chance we may have missed the boat on this anyway and we could be looking at things in the wrong way.
If societies can’t make enough profit in what shouldn’t be a capital-hungry business - low-risk residential mortgages - who could disagree with the plcs? Who could argue that mutuals should be left alone?
So if societies can’t make enough profit to build the reserves they need they have to either give up the ghost or cut costs. It’s that simple. But they should not be finding a clever way to disguise the fact that they can’t make enough money.
At the best of times societies struggle to wake up to the reality of how efficient they need to be in the brave new world of lending after the credit crisis.
Banks are already repairing their balance sheets and will be back on track before we know it.
So where does all this leave the mutual sector? Destined to be wedged into a two-tier market.
The days of gaining a warm glow from the idea of mutuality have long gone, with those organisations of old replaced by a new breed that don’t care about things like heritage.
So come on societies, it’s time to get real and get back to basics. And that means offering low-risk residential lending that comes with a significantly lower cost base.
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