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Friday 02nd of October 2009
September 28, 2009    

BSA argues Northern Rock should return to mutual status

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by Kay Murchie

The Building Societies Association (BSA) is urging the Government to return Northern Rock to the mutual sector, arguing that mutuals take less risk than banks owned by shareholders.

Mutual building societies are owned by their members, not by shareholders, and are run for the benefit of those members.

The BSA said a new report points to a strong case for converting struggling banks into mutual institutions.

Primary author of the report, Jonathan Michie, Professor of Innovation and Knowledge Exchange at Oxford University, said: ” We must not allow the UK’s financial services sector to return to ‘business as usual’.

“Already we are seeing a return to the bonus culture. This is fuelled by profits boosted by the increased market power of banks. It is vital that banks face strong competition from mutual building societies.

“That would reduce the risk of the credit crunch being repeated,” added Mr Michie.

John McFall, chairman of the Treasury Select Committee, comments: “This is a timely contribution to the debate on the future of our financial services sector.”

“If there was ever a time for an expanded mutual sector, it’s now. We desperately need to restore faith in financial services in this country,” added Mr McFall.

Adrian Coles, director general of the Building Societies Association, believes that by returning to Northern Rock to its former mutual status, it would help strengthen competition and create a more diversified financial sector.

Northern Rock had been a building society but it demutualised in 1997. However, it collapsed at the onset of the credit crunch in autumn 2007 after savers staged a nationwide run on the bank. It was then nationalised in February 2008.

The Government is planning for the bank to be split into two divisions - a “good bank” of profitable assets and “bad bank” of toxic debts, a move that has been criticised by the BSA.

Northern Rock will see a new “BankCo” - which will hold its savers money, carry out new lending, and retain some of its existing mortgages.

Meanwhile, “AssetCo” is set to hold the balance of the existing residential mortgage book and this division will be responsible for repaying the £11 billion of its £26.9 billion loan.

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