The Cost and Benefits of a Building Society Converting to a PLC

REPORT ON THE COSTS & BENEFITS OF A BUILDING SOCIETY CONVERTING TO A PLC

Introduction

At the beginning of this century there were more than 2000 building societies, fiercely independent mutual organisations, formed in the spirit of Victorian self help. There are now just 71. Some of these that have disappeared were terminating societies with a fixed wind up date. The last “terminating'; society was the Fist Salisbury which wound up in 1980. Other societies have been swallowed up in take-overs or converted into banks in the great 1997 demutualisation.

This assignment will discuss this trend with particular reference to the potential costs and benefits in the short and long term. This assignment will examine the costs and benefits to the building societies as well as those to the members and staff.

The Costs and Benefits to the Building Society

Conversion to plc status is seen as having the major advantage that there would be freedom from the limitations imposed by the Building Societies Act 1986, 1997 the statutory framework for the Building Society industry. The restrictions the Act impose include the following:

1) 75% of all lending has to be secured against residential property

This means that Building Societies are limited in their participation in the more risky, but more rewarding unsecured lending. At the moment, Societies can make unsecured personal loans up to a limit of £15,000 per customer, whereas there is no ceiling for Banks. Building Societies with less than £100m of assets are not permitted to make unsecured loans.

2) No more than 50% of funds may be raised on the wholesale markets

This limit was previously 40% before the revised 1997 Building Societies Act.

Building societies have eagerly taken the opportunity to raise money in the wholesale markets, which have frequently proved to be the cheapest source of wholesale funds (Wholesale funds are large deposits placed by companies and financial institutions, bearing an interest rate in line with the market rate rather than base rates). They have used these funds to even out any shortfall in the inflow of retail funds to meet the mortgage demand.

Banks have no ceiling on raising wholesale funds, which are usually cheaper than retail funds. Building Societies may also find themselves at a disadvantage in access to wholesale funds at competitive rates. As only 50% of funds can be raised from the wholesale market only the very largest societies can maintain the necessary standing in the international capital markets which allows wholesale funds to be tapped on the finest terms.