Media

Government must return Northern Rock to the mutual sector, says Oxford report

27 September 2009

A report, to be published on 27 September for the Building Societies Association, argues that there is a strong case for converting failed banks into mutual organisations and for returning Northern Rock to the mutual sector. 'Converting failed financial institutions into mutual organisations', authored by Oxford professor Jonathan Michie from the Centre for Mutual and Employee-owned Business, concludes there are four main arguments for this approach: bio-diversity, risk appetite, competition and as a means of repaying the taxpayer. 

Bio-diversity
The report argues the more diversified a financial system is in terms of ownership and governance structures and portfolio make-up, the better it is able to weather the strains produced by the normal business cycle. Mutuals, which are not owned by investing institutions, can counter-balance the short-termist pressure of the City. Mutuals also play their part in reducing the concentration of financial sector resources and employment in the City, dispersing wealth and welfare to regional and local economies.

Risk appetite
Mutuals tend to adopt a lower risk profile both because their objective is safety and fair pricing for members, not profit extraction for shareholders, and their main source of capital is that generated within the business, which is not easily replaced, says the report. 

Competition
Keeping a reformed Northern Rock independent of the big banks is good for competition, says the report.  As a mutual committed to its core business, a remutualised Northern Rock will 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
The report urges the Government to realise the optimum value for the taxpayer.  A re-launched and re-mutualised Northern Rock can pay for the taxpayer stake over time. A deferred payment profile can give the optimum outcome, both returning the full value to the taxpayer but also achieving other public policy goals.
Professor Jonathan Michie, Professor of Innovation and Knowledge Exchange at the University of Oxford, said: 'We must not allow the UK's financial services sector to return to the 'business as usual' model that has proved so costly to the economy and public finances. 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 the banks face competition from mutual building societies. That would also reduce the risk of the credit crunch being repeated. Remutualising Northern Rock would thus deliver to consumers and taxpayers.'

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 considering 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.'

The BSA will launch the report at a Labour Party conference fringe on Sunday 27 September. The Rt Hon John McFall MP, Chair of the House of Commons Treasury Committee, is expected to support the report's call at a further fringe meeting on Monday 28 September. In his foreword to the report, he writes: '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.The ideas discussed in this publication provide a fertile area for debate and the Government should carefully consider the potential for returning Northern Rock to the mutual sector.'

For more information, the full report or to arrange an interview, please contact Professor Jonathan Michie at jonathan.michie@kellogg.ox.ac.uk. You can contact the University of Oxford Press Office on 01865 280534 press.office@admin.ox.ac.uk

Notes to editors

  • Northern Rock was a building society up until October 1997 when it converted to a bank.  In February 2008, Northern Rock was taken into temporary public ownership where it remains today.
  • The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 52 UK building societies. Building societies have total assets of over £370 billion, and, together with their subsidiaries, hold residential mortgages of over £245 billion, more than 20% of the total outstanding in the UK.
  • Jonathan Michie is Professor of Innovation and Knowledge Exchange at the University of Oxford where he is Director of the Department for Continuing Education, President of Kellogg College, and Director of the Oxford Centre for Mutual & Employee-owned Business. See www.kellogg.ox.ac.uk/about/fellows/michiej.php
  • The Oxford Centre for Mutual and Employee-owned Business is based at Kellogg, one of Oxford University's graduate colleges.  Kellogg College supports the lifelong learning work of the University, giving opportunities for the continuing education and professional development of mature and part-time students.  The College is closely associated with the Oxford University Department for Continuing Education. The principal activities of the Oxford Centre for Mutual and Employee-owned Business are research and professional development via tailored short courses and educational programmes focused on the business needs of the mutual and co-owned sectors.  With a commitment to applied knowledge and dissemination, the Centre runs conferences, seminars and guest lectures and promotes networking and partnering within and beyond Oxford.  See www.kellogg.ox.ac.uk/researchcentres
  • Adrian Coles, BSA Director-General, will be launching the report at a Labour Party Conference fringe event on Sunday 27 September.  Financial meltdown - who can you trust? 6.00pm -7.30pm, Chartwell Room, Hilton Metropole, Brighton.