Analysis of the Retail Financial Services Market
4.3 Why Building Societies are better than Banks
The presence of building societies offers advantages not only to building society members but also to the financial system as a whole. The more diversified a financial system is the more likely it is to be able to meet the stresses and strains that emerge as part of the normal business cycle and as a result of changes in consumer preferences. Secondly, building societies serve customers because that is what they initially are there for. Banks serve customers as a means of generating profits for shareholders.
Thirdly, building societies provide a competitive spur to banks and other institutions. By offering competitive rates societies inhibit banks and others from further widening their own margins. The disappearance of societies will likely result in less attractive interest rates not only for building society members, but also the customers of other institutions. In the debate on charges for cash machine withdrawals it is clear that the "no charging" stance adopted by building societies has had a significant impact on the charging strategy of other institutions.
There are also advantages in geographical diversity. The majority of building societies are regional or local institutions, run from different parts of the United Kingdom, rather than from London. There is a head office of at least one building society in all twelve of the economic planning regions of the United Kingdom. These institutions can more readily take account of the special characteristics of their locality than if they are merely branches of much larger institutions quoted on, and controlled by the international capital markets.
A fifth factor is that building societies are systemically risked averse, as they cannot replenish capital as readily as plc's. If a plc makes a substantial loss diminishing its reserves it can ask its shareholders to provide additional capital, as at least one large bank did in the 1980s.
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