The Future and Development of Building Societies

What is the role of building societies today?

• Building societies now have a significant and stable role in the financial system
• They offer competitive savings and mortgage products
• They also generally offer a very simple range of financial products.

What are the current challenges that building societies face?

• Regulation of all financial institutions has been significantly enhanced. For building societies, this has meant higher capital requirements, other prudential requirements, for example in respect of the terms on which mortgage loans can be made, and stricter conduct of business requirements. These are costly to implement, especially for building societies
• Building societies have to face strong competition from not only each other and from their traditional competitors - retail banks, but also from new challenger banks operating without any physical infrastructure and therefore at significantly lower costs
• The requirement on major banks to ring fence retail business from their investment business has added to further significant pressure on building societies. The unintended consequence of this is that banks have huge amounts of deposits trapped in their retail banks, leading them to compete aggressively for mortgage business
• Because building societies are specialist institutions, they always remain vulnerable to housing market developments

How have building societies developed across the world?

• The building society industry developed strongly in Australia, New Zealand and South Africa, but in all those countries, the building societies have become, or been taken over by banks
• The savings and loan association, developed in the USA was similar to building societies, although, they had a wider range of lending powers and could have companies as an alternative to mutual status. However, they were confined to operating within the states
• Similarly, they borrowed short and lent long without the variable rate mortgage, which caused significant problems when the interest rate rose in the 1980s. Also, there has been a huge secondary market in the US, which enabled the association to offset their risk by selling mortgage loans to secondary market institutions and buying back more liquid securities
• The Bausparkassen - a variation on the traditional building society developed strongly in Germany and Austria. They operate a closed system in which potential borrowers must first invest for a period of years

Where have building societies not developed?

• Building societies did not develop at all in Canada, but rather mortgage lending has been done by commercial banks
• In other European countries, particularly Denmark, the mortgage bank system prevails, by which long-term bonds are issued and used to make mortgage loans on matching terms