The chief executive of the troubled Dunfermline Building Society (DBS), has today released a statement on the society’s website. The statement clearly aimed at calming speculation about the future of DBS and avoid a Northern Rock style run on the society says:

As everyone is aware, economic conditions over the last year or so have been extremely adverse, which has badly affected many organisations and economies across the world. The UK building society sector has not been immune from this economic downturn and several societies have already reported losses and major asset value write-offs. In the case of Dunfermline Building Society, our year-end results, which have attracted much press speculation over the past week, will be released within the next 10 days. In the meantime, I can confirm we continue to meet our regulatory capital requirements and have strong liquidity. Additionally, our network, telephone service and website services are continuing to offer superb service to our Members, and our staff are on hand to provide reassurance and to answer questions. It is very much business as usual. The Board and Executive team of Dunfermline remain wholly committed to protecting the best interests of our Members and staff and we are continuing to do everything in our power to ensure Dunfermline Building Society’s future as a strong mutual building society. Jim Willens, Chief Executive

The Herald, Scotsman & FT are today running stories that centre on potential solutions to the problems of DBS. It appears that the FSA is looking to a mutual led solution whereby other building societies will be asked to buy ‘Permanent Interest Bearing Shares’ or PiBs as a way of boosting DBS’s balance sheet. As a mutual the government cannot simply start buying up shares as it did with Northern Rock and RBS. Traditionally the building societies have taken care of each other, Nationwide’s takeover of Derbyshire & Cheshire last year being a good example. However the larger socities like Nationwide have already faced downgrades from the ratings agencies and would be placed under further pressure if they took over another struggling society. Thankfully, with DBS being covered by the Financial Serivices Compensation Scheme (FSCS) we have not seen the same problems as Presbyterian Mutual suffered in Northern Ireland.

A shared investment in PiBs from other building societies, HM Treasury and possibly the Scottish Government seems to be emerging as the preffered rescue method. This will allow DBS to continue to function as an independant society, so safeguarding almost 500 jobs in the Prime Minister’s back yard.

Traditionally mutuals have been seen as safer than traditional banks because their business model is different and because they are limited by statute so that their borrowing from the markets is restricted. The problems at DBS stem from where the society has departed from the traditional residential loan book towards commercial lending, a relatively new concept for building societies. While I am in no doubt that the mutual model generally offers a better alternative to ‘casino capitalism’, questions must be asked about how some societies have been able to depart from their age old ways and then subsequently get into trouble. The Chancellor has already sounded out his intention to boost the mutual sector and use it as an example going forward. He is right there may be problems on the margins of the mutual sector, but compared to the problems of the Banking sector as rescue of DBS will come with a minimal price tag.

Perhaps the building societies need to look again at their democratic structures and controls, going back to their roots. I’m fairly certain that had ordinary members had an increased role in the governance of DBS it would have steered clear from commercial lending. Certainly the Credit Unions while restriced from commercial lending are much better than the building societies on the whole at involving members in their day to day operations. Increased democratic control in the Building Society sector could only be a good thing.

Not the most catchy headline, I admit. However the annual results of the Stroud & Swindon Building Society highlight the impact that the Financial Services Compensation Scheme (FSCS) levy will have on smaller mutual societies. The levy was introduced to boost the scheme’s funding after the collapse of the Icelandic banks.

Stroud & Swindon announced an annual profit of £3.2m before one of expenses and provisions. A solid result for the 13th largest society in the face of the worst financial crisis since the 1930s, but still down from £7.7m in 2007. However the £3.2m is only half the story. The society revealed that it has been charged almost £5m by the FSCS which in addition to provisioning for bad debts resulted in an overall loss of £2.7m after taxes.

The FSCS levy is calculated using the proportion of depositor funds used to fund lending activities, this has the perverse effect of charging financial institutions who have not used the money markets in a wreckless manner, more proportionally than those who have. Building Societies and other mutuals are resticted by law and cannot borrow as much as banks can forcing them to maintain a more prudent business model which depends on consumer deposits. The FSCS should factor into its’ thinking that no depositor has lost a penny from a building society since 1945! Societies which get into difficulty have always been very good at helping each other through mergers and co-operation. We’ve seen such mergers recently.

The large bills for the FSCS have been from failed banks, and they ought to know the difference and exercise some discrestion. In essence the FSCS is levying a punitive tax on the Building Society sector because they think the sector is healthy enough to actually pay up – Unlike RBS, HBOS, Northern Rock Et al.

Speculation is mounting in the Scottish press and in political circles about the future of the Dunfermline Building Society. The society, Scotland’s largest, is, according to The Scotsman, expected to reveal a loss of £29m over the last 12 months, mainly due to impaired commercial lending. This compared to a £2m profit the previous year. Such a comparatively massive loss as fuelled speculation that the society will be forced to seek a merger with another mutual.

No announcement has been made, and the Dunfermline has sought to play down both their problems and speculation about a possible tie up. A number of names are mentioned in the reports including Nationwide, the largest UK society and rescuer of two societies last year. Yorkshire Building Society has also been mentioned as a good partner given that the regional spread of the two business would match well. However the Sunday Herald has also reported that Dunfermline is in talks with Britannia & The Co-operative with a view to joining their so called ’super merger’.

Whatever the truth behind the rumours and speculation, the Dunfermline is looking extremely weak and a merger/rescue seems inevitable.

Back in January we reported that a row had erupted over plans by the Department for Work & Pensions (DWP) to sub-contract social fund and crisis loans to the third sector. While this plan would provide a potentially substantial boost to the Credit Union movement in the UK, there was widespread condemnation that the DWP seemed to want Credit Unions to charge for these loans. Loans which are currently free.

Yesterday the DWP published its’ response to the consultation that had sparked this row in the first place. The response, signed by Kitty Usher MP, backs away from the controversial idea of charging for social fund loans. The government had quickly responded to this end when the row erupted initially, however this is the first time that the U-turn has been confirmed in writing. You’ll remember that the change of policy was announced even before the consultation period was over.

From a mutual perspective the government’s response is still positive about partnership working:

“We remain interested in the idea of setting up a loan scheme administered by
external providers to replace Social Fund loans. We are therefore taking powers in
the Welfare Reform Bill to enable the Secretary of State to enter into
arrangements with external providers to provide loans in place of the current
Social Fund provision. We will work with interested parties to develop this policy
further. In addition, we remain committed to providing better financial education
and wider access to financial services to those on benefits and low incomes.

We will not be charging interest on Social Fund loans. As many respondents
recognised, this would disadvantage excluded groups. We agree. Any loan
scheme set up by an external provider in place of Social Fund provision will also
be interest free.”

Source: Government response – The Social Fund: A New Approach (Bold added by me)

In general terms the credit union sector looks like it will be given the option to work ever closer with the DWP. While not all credit unions will want to, a significant proportion will and will hopefully be able to increase their income and consequently their sustainability through partnership with the DWP. Big questions remain though, clearly the DWP expected credit union involvement to be in some sense self funding through interest charges. With this option gone there are no clear proposals on just how the DWP will compensate credit unions for their services.

In an interview today with Saturday PM on BBC Radio 4, the Labour MP and senior member of the highly influential Treasury Select Committee, John Mann, has called on Lloyds Banking Group to be nationalised and re-structured.

Mr. Mann said that in the light of the losses (£10Bn) incurred by HBOS, now part of LloydsTSB and the subsequent collapse in share prices and confidence last week, that the bank ought to be nationalised. It was then suggested that the banks be re-structed in order to separate out retail banking from the riskier business of investment banking. Mr. Mann then lent his support to the separation of the Halifax from Lloyds and suggested that it should be re-established as a building society as a confidence building measure. Such restructuring would be complex as the combined LloydsTSB and HBOS now own a large number of well known banking brands including: Bank of Scotland, Cheltenham & Gloucester, Scottish Widows, Clerical Medical, Birmingham Midshires, Intelligent Finance, Black Horse & St. James’s Place. This in addition to the obvious LloydsTSB and Halifax brands.

With so many brands and iconic names at stake, not to mention the wider economy, it’s hard to know where such government backed restructuring should start and end. Certainly there has been and will continue to be pressure from the SNP led Scottish Executive to have the Bank of Scotland preserved as a company it its’ own right and with it re-ensconsed on The Mound in Edinburgh. As such singling out the Halifax brand seems unlikely when national pride and many jobs are at stake. Any nationalisation and resturucting will need to be announced soon if the expected tide of job losses are to be stopped.

Despite the obvious complexity involved in restructuring the banks Mr. Mann is now adding momentum to The Co-operative Party’s call for re-mutualisation of the de-mutualised building societies. Given the mess of the HBOS-Lloyds shotgun marriage Halifax is the logical target for such calls, but the addition of an influential voice will only strenthen the re-mutualisation campaign. A campaign which has not yet garnered front bench support and while Ken Clarke and the Conservatives have been quick to pour scorn on the problems surrounding the banking system generally and the combined Lloyds Banking Group they are notably short on solutions. Solutions that both Mr. Mann and The Co-operative Party are offering.

The Treasury has today however, sought to damped speculation that Lloyds Banking Group will be nationalised. The Chancellor of the Exchequor has refused to rule any action in or out whith relation to the bank which while clearly true, has only increased the nationalisation speculation which the treasury has sought to calm over the weekend. The government currently owns 43% of Lloyds Banking Group.

Working Lunch

Today BBC2’s ‘Working Lunch’ programme featured an interview with Neville Richardson the chief executive of the Britannia Building Society. Mr Richardson discussed a number of issues including the merger plans with The Co-operative Financial Services.

The interview was split into two segments, the second of which concentrated on the current recession and the role the financial services sector has played. He repeatedly, and rightly, pointed out the differences between banks and mutuals in terms of both ethics and business model. According to Mr Richardson Britannia has seen a large increase in customers attracted by the mutuality of the business and recognising that building societies are a safer home for savings. He mentioned that 140,000 new savings accounts had been opened in the last three months inspite of record low interest rates. There has been concern that current low rates would discourage saving at a time when the banks are desperate to raise capital with which to lend.

Questioned on whether some of the demutualised banks which have suffered disproportionately during the credit crunch Mr Richardson appeared to support the remutualisation of these institutions an issue currently featuring in a campain by The Co-operative Party which represents the mutual sector. Mr Richardson said that there would be some major complications arising from remutualisation, but that these could be overcome and that he supported an expanded mutual financial sector. The idea certainly has merit and hopefully it will be picked up by government as a solution to current problems.

The Co-operative Financial Services (CFS), the company that consists of The Co-operative Bank, Co-operative Insurance Society & Smile, has today announced that it will merge with the Britannia Building Society creating what has been dubbed as a ‘Super Mutual’. The combined bank will have £70bn in assets and a Tier 1 capital ratio of 9.8%. The combined business will have approx. 300 high street branches.

The merger is subject to the Butterfill bill passing through parliament in the near future. This bill represents a comprehensive overhaul of mutual legislation which has become cumbersome and outdated. Members of the Britannia will become members of the Co-operative Group and the two businesses will eventually trade under The Co-operative brand. It’s unclear how the announcement will affect Mutual Plus, a branch access agreement between Yorkshire & Britannia Societies.

Although described as a merger it is widely believed that the Britannia, has been forced to seek a tie up. Though building societies are legally restricted when it comes to wholesale funding, the Brittania is known to be more exposed and therefore more affected by the credit market freeze. CFS on the other hand funds all lending from deposits and is a strong partner for the business.

While there is clear sense in merging the businesses – £60m approx savings with no branch redundancies, it does seem odd that the well liked and highly regarded CEO of CFS, David Anderson is leaving the business to make way for  Bob Burlton & Neville Richardson from the Britannia. David has ensured that the Co-op has been relatively unaffected by the current financial crisis and has postioned the business well for weathering the economic storm. Perhaps there a personal reasons for his departure, but it seems odd that the management of the most exposed and poorly prepared building societies will take up the reigns. Hopefully the Co-op Group board will be prepared to scrutinise their plans to avoid repeating past mistakes.

The Co-op is currently persueing a strategy of more closely integrating their various financial businesses following the bancassurance model, a model currently under attack from commentators as having contributed to current economic woes. With massive internal reorganisation and now a merger The Co-op will have to work hard not to take their eye of the ball.

In response to the announcement the FSA has stated that they will be adjusting depositor protection rules to allow the two mutuals to keep seperate deposit gurantee limits for the time being.

UPDATE:

It appears that the credit agency Fitch shares some of my concerns regarding this merger and has downgraded CFS’ long term debt from A to A-. It stated that Britannia’s residential lending portfolio was not regarded as being as robust as that of The C0-operative Bank.

HM Treasury is expected to make a long awaited announcement on whether savers in Equitable Life, the collapsed life insurer and pension firm, will be compensated for their losses. Those who have suffered most are the societies pension customers who have seen the value of their investments or the payments from annuities slashed since the company all but collapsed in 2000.

Today’s announcement will be the latest in a long line of statements and official investigations into what went wrong at Equitable Life. In July a parliamentary ombudsmen called for full compensation to be paid because regulatory failures left the government partially liable for losses. It is however estimated that fully compensating savers would cost £4.5bn a sum that the government is unlikely to cough up easily.

As the credit crunch bites it is good to remember that some firms found it difficult to trade even during the boom years.

Credit Unions in Wales are reporting a surge in membership and requests for loans in the wake of the credit crunch. Wales recently became the first part of the UK to have universal access to a credit union for everyone living there.  The credit unions attribute the surge of interest in their services on the banks scaling back their lending in the face of the economic down-turn.

It seems like good news for the sector which has sometimes struggled to carve a niche in the UK. Credit Unions here are for historic reasons far smaller than in Europe or the United States. It’s not all good news though as one of the credit unions interviewed by the BBC indicates that loans are starting to be repaid more slowly than in the recent past.

Credit unions are however showing themselves to be an excellent alternative to the mainstream financial services sector, not directly impacted by wild share speculation or investment losses from poorly performing investments. As co-operatives they are run for the benefit of members not for profit maximisation and the BBC article does an excellent job of explaining that.

The European Central Bank (ECB) is today under mounting pressure to reduce interest rates in the euro-zone. Rates in the United States and United Kingdom have fallen sharply in recent months but the ECB has been slow to follow. The growing disparity in rates has caused the Euro to gain in value against other world currencies, at one point last week, being within a whisker of parity with the pound sterling. This is adding to the problems of the euro-zone though. Germany the zone’s largest economy is also Europe’s largest exporter and the value of the Euro is having a negative impact on German export competitiveness.

Conventional wisdom had until recently declared that Europe would be less affected by the economic downturn than the other more finance dependant economies of the Anglo-Saxon world. Germany & France were not victims of a property bubble and personal debt levels are lower. Such views are however fast being consigned to the history books as more and more negative economic data is released. Spanish economic output fell over 15% in December compared with the previous year. The Irish economy is reeling, German consumer confidence is down and yesterday there was a major crisis as Commerzbank has been forced to seek a rescue from the German Federal Government

Commerzbank isn’t the first German bank to need help, but it is certainly the largest and most symbolic of the current crisis, striking as it does in Frankfurt-am-Main the heart of German and European banking and finance. With crisis mearly a few city blocks from ECB headquarters it seems increasingly likely that the ECB will be forced to cut rates from their current 2.5% level. There can be no doubt that there will be pressure to do so coming from Berlin, given that there is an election this year.