Are mutuals the future of banking?

There is, arguably, no one in the UK in a better position to give an overview on the global financial crisis, nor the impact on the mutual sector,...

Mutuals, believes Mr McFall, have survived the test of the crisis is reasonably good shape, not least because they relied on members’ own savings for their lending, rather than borrowing from other banks. “I think they have emerged very well in terms of their business model,” he says. “Their model restricts them going to the wholesale market to the extent that PLCs did. But in the post-crisis environment, where size still matters, where the cost of borrowing matters, building societies are feeling the strain.”

But recognition that mutuals have been placed under specific stresses by the crisis has not caused Mr McFall to lose confidence in the sector. “Not at all,” he says. “The big lesson, the slogan we should use, is ‘back to the future’.” 

As an example, Mr McFall points to the fact that he is giving the keynote speech at the 175th anniversary celebrations for the Airdree Savings Bank — an organisation that is effective and successful, using the principles of mutuality, collective support and with a not-for-profit ethos. It is now the only remaining independent local savings bank — a reminder of a once-significant mutual sector.

“There must be lessons,” says Mr McFall, reflecting on the crisis. “I think we have room in the market for a variety of models, including the mutual model, whose first priority is its members.”

One of the questions, though, is whether organisations that operate for the collective good of their members need to operate collectively — whether in a market that favours the mega-banks for their low cost of operations, their (theoretically, at least) ability to spread risk across activities and with a lower cost of borrowing, mutuals need to find better ways to work together, to reduce costs and improve their ability to raise capital. Mr McFall believes they do.

“They do need to work together to get economies of scale,” he explains. “That would be beneficial for the members. Given the structure of banking at the moment, we do need more competition and more [business] models.”

In this, Mr McFall is speaking not only about the state of the personal banking and investment banking markets. He refers also to the restricted ability of small and medium sized enterprises to borrow in an environment when banks are unwilling to lend, especially to higher risk borrowers. 

“We need alternative forms of lending to business and the regions,” says Mr McFall. Specifically, he believes, mutual lenders could potentially fulfil the role undertaken in Germany that has kept lending to SMEs going. “We need to rebalance the economy,” argues Mr McFall. “The needs of SMEs are not being catered for.”

The focus now needs to be on understanding what went wrong and correcting the weaknesses in the structure of the banking industry. 

This is why Mr McFall took the initiative (with Which?) to create the Future of Banking Commission, with an objective to achieve a broad political consensus behind reform proposals. The former Conservative shadow home secretary David Davis is chairing the Commission, Liberal Democrat Treasury spokesman Vince Cable is another member, as is Mr McFall himself. Other big hitters are also members. 

“I am concerned about the lessons being learned,” admits Mr McFall. “That is one of the reasons I have established the Future of Banking Commission. I want a wide group of people to look at this issue, engage with the public and society and keep the debate going politically. I think it has to be on the agenda.”

The Commission will remain a priority for Mr McFall now that he is no longer the Labour/Co-op MP for West Dunbartonshire. But in the run-up to the election, Mr McFall insisted that he had not decided what he would be doing afterwards. “I don’t feel my job has been done until May 7th,” he says. 

Mr McFall has become one of the most senior political figures, a privy councillor, close to Gordon Brown and very influential in the debate on reforming the banking system. The Movement has lost a powerful advocate. But his role in keeping a watchful eye over the welfare of the mutual sector means that Mr McFall has cemented an important place in the history of the Movement.

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