The Economics of Building Societies

180 Pages·1982·15.494 MB·English

by  T. J. Gough (auth.)

THE ECONOMICS OF BUILDING SOCIETIES
Also by T. J. Gough
FUNDAMENTALS OF MANAGERIAL ECONOMICS
(with S. Hill)
THE ECONOMICS OF
BUILDING SOCIETIES
T. J. Gough
© T. J. Gough 1982
Softcover reprint of the hardcover 1st edition 1982 978-0-333-30029-9
All rights reserved. No part of this publication may be
reproduced or transmitted, in any form or by any means,
without permission
First published 1982 by
THE MACMILLAN PRESS LTD
London and Basingstoke
Companies and representatives
throughout the world
ISBN 978-1-349-05675-0 ISBN 978-1-349-05673-6 (eBook)
DOI 10.1007/978-1-349-05673-6
Contents
Preface vii
Acknowledgements Vlll
2 Objectives 2
2 Savings 15
3 Mortgages 30
4 Equity between Members 47
5 Interest Rates 65
6 Efficiency 81
7 Concentration and Mergers 102
8 Branches and Advertising 118
9 The Housing Market 132
10 Change and Reform 147
Postscript 158
References 162
Index 171
v
Preface
The aim of this book is to examine the economic operation of building
societies in the United Kingdom. Its theme is largely 'microeconomic',
analysing the actions of the societies as firms, but also deals with their
wider role in the economy. It is a highly individualised interpretation
and brings together published work of the author which has appeared in
various journals over recent years. It also presents new features which
have not been published previously - notably on interest rates, efficiency
and house prices.
Recent years have been characterised by the building societies being
subject to increased criticism. This adverse commentary has largely been
fragmented and lacking an overall dimension. This book attempts to
deal fairly with such criticism, putting the comments in the words of the
commentators and providing the societies' response. An overall evalu
ation is then made in the light of the economic framework within which
the societies operate. A sense of perspective is therefore added, and
hopefully a degree of objective appraisal.
The aim of the book is that it should be able to be understood by a
wide cross-section of people - e.g. those in the building societies
themselves, investing and borrowing members, interested persons in
related industries or financial institutions, as well as professional
economists, financial experts and politicians who will be actively
involved in the future of the building societies.
The author offers this as a platform for constructive and objective
debate over the future economic role of this major British financial
institution. It is much to the credit of the societies, and the Building
Societies Association, that such a debate can be conducted with the aid
of the mass of reliable information which is readily available.
vii
Acknowledgements
Whilst this work is very much a personal viewpoint, it nevertheless
draws on published works written jointly with colleagues, Mr T. W.
Taylor and Mr S. Hill, both of the Department of Applied Economics at
UWIST. My thanks go to them in indirectly influencing the content and
direction of this work.
I also wish to thank Mrs J. Sparks, Librarian at the Friary Library,
UWIST, for her considerable help in tracking down many of the
references used in this book.
My publishers and I are grateful to the following who have kindly
given permission for the use ofc opyright material: the Bank of England,
Economics Division, for the data from the Bank of England Quarterly
Bulletin (September 1979); the Building Societies Association for the
data from various sources, and the extracts from the report 'Building
Societies and the Savings Market', May 1979, prepared by the British
Market Research Bureau Ltd; the Building Societies' Gazette for the
data from articles by Professor Glyn Davies and Martin J. Davies; the
Controller of Her Majesty's Stationery Office for the tables from
Economic Trends Annual Supplement 1980 (CSO), Reports of the Chief
Registrar of Friendly Societies and Housing and Construction Statistics;
and the Equal Opportunities Commission for the extract from the
report 'It's not your business, it's how the Society works' (1978).
Finally, my thanks go to Mrs Margaret Aven, Mrs Barbara Williams
and Mrs Sadia Matthews for their speedy typing of the manuscript.
T. J. G.
viii
1 Objectives
The rate of growth of the Building Society Movement ... has been so
different from all previous experience in degree as to make the
movement almost different in kind. From being a mere ancillary
feature in the national economic life, it is now in the main stream of its
development. For, prior to the war it was at least possible to conceive
the economic development of the community proceeding, in the
absence of such an institution, along alternative lines. It was at least
possible, for example, to conceive that the system of private mortgage
could have been extended or amplified to meet the actual and
gradually growing needs of the owner-occupiership of dwelling
houses. But today the situation is essentially changed, for the
elimination of this economic agency would have made a profound
difference, and not a mere casual change, to our economic life. It is in
this sense, therefore, that the movement, while exhibiting no par
ticular changes in form, has enjoyed are-birth.
The above quotation might at first sight seem to allude to the growth of
the building societies in recent decades. The 'war' referred to one might
guess, with justification, to be the Second World War. The quotation in
fact comes from a statement made in 1927 by Sir Josiah Stamp! and the
war he refers to is the Great War.
The quotation serves to illustrate the great importance building
societies had already reached in the 1920s; they were obviously regarded
then as an indispensable institution. Their phenomenal growth since
that date, more especially in the 1960s and 1970s, has again affected
another sea-change; perhaps we may call it a second re-birth.
It is not the purpose of this work to analyse the history of the building
society movement. This has already been done more than adequately by
several writers.2 What it does seek to do is to provide a modern
interpretation of the role of this major financial institution - to analyse
and explain its functioning - and to speculate on reforms or changes
that might be envisaged over coming decades.
Yet the historical perspective cannot be completely ignored. The
2
2 The Economics of Building Societies
societies'origin as self-help co-operative institutions is still to the fore in
tenns of the image they present to the public. Bellman3 in the 1920s
defined a building society and its role as follows:
A Building Society is a combination of investors and borrowers
operating under a measure of Government control to promote the
ideals of thrift and home ownership. The investors - who are either
member-shareholders or merely depositors - supply the funds from
which house purchase loans are made. The difference between the rate
of interest received from the borrower and that paid to the investor,
represents the margin which enables a Society to meet its management
expenses - a very modest figure in most cases - as well as to build up
and maintain adequate reserves.
The working basis of an incorporated and penna nent Building
Society resembles that of a bank, from which, however, it is widely
differentiated in constitution and objects, being essentially co
operative or mutual in principle and existing solely for the benefit of
members (p. I).
Such a role is reiterated in the Building Societies Act of 1962 as follows: 4
The purpose for which a society may be established under this Act is
that of raising, by the subscriptions of members, a stock or fund for
making advances to members out of the funds of the society upon
security by way of mortgage of freehold or leasehold estate (Chapter
37, Part I, Section 1(1)).
Thus the building societies are traditionally believed to be mutual self
help institutions which specifically do not make profits. Indeed the word
'profit' is never used and is specifically excluded in the annual accounts
presented by each society. Instead the synonym of 'surplus' is used, and
this confonns to the tenn used in the Building Society Act of 1962 where
'funds of the society which are not immediately required for its
purposes' are designated by the tenn 'surplus funds' (Section 58(4)). It is
this non-profit-making basis which seems to account for the general lack
of enquiry into the efficiency ofbuiIding societies. While many industries
have been subject to scrutiny as to the conduct of their affairs (in relation
to pricing policy, level of profits, suppression of competition), the
building societies have generally not come under the spotlight of official
enquiry. Exceptions can be found to this, such as the National Board for