Government should remutualise Northern Rock

A new report published for the Building Societies Association (BSA) reveals a strong case for converting failed banks into mutual organisations. In light of the report, the BSA urges the Government to consider seriously returning Northern Rock bank to the mutual sector.

The report, by the Centre for Mutual and Employee-owned Business at the University of Oxford, concludes that there are three economic arguments for a stronger mutual sector as part of a mixed financial system: 'bio-diversity', risk appetite and competition.

Bio-diversity

A financial system with diverse ownership and governance structures is better able to weather the strains of the business cycle than one which is plc-dominated, says the report. Mutuals can counter-balance the short-termist pressure of the City. Mutuals also help reduce the concentration of financial sector resources and employment in the City, dispersing wealth and welfare to regional and local economies.

Risk appetite

The report finds that mutuals tend to adopt a lower risk profile because their objective is safety and fair pricing for members, not profit extraction for shareholders.

Competition

Keeping a reformed Northern Rock independent of the big banks would be good for competition. A remutualised Northern Rock would help the Government to meet its policy objective of supporting competition and diversity through the maintenance of a strong mutually-owned financial sector.

Repaying the taxpayer

In any exit process the Government needs to achieve optimum value for the taxpayer. A re-launched and remutualised Northern Rock can repay the taxpayer stake over time. A deferred payment profile can give the optimum outcome, both returning the full value to the taxpayer and achieving other public policy goals.

Commenting on the report, The Rt Hon John McFall, MP, Chairman of the Treasury Select Committee, said:

"This is a timely contribution to the debate on the future of our financial services sector. If ever there was a time for an expanded mutual sector, it's now. We desperately need to restore faith in financial services in this country"

Adrian Coles, Director-General of the Building Societies Association, said: "The Government has said that financial mutuals can provide a robust alternative to financial services companies in the future - what better way to demonstrate this than to seriously consider returning Northern Rock to the mutual sector?

"Given that remutualisation would strengthen competition and create a more diversified financial sector, it could be expected to generate an advantage to the taxpayer over the long run in excess of the immediate benefit of any capital proceeds in the short run."