The Future and Development of Building Societies

The Future and Development of Building Societies

Sir Mark Boleat

40 years: Executive leadership & banking

In the final video of the series, Sir Mark Boleat discusses the current issues and the development of building societies across the world.

In the final video of the series, Sir Mark Boleat discusses the current issues and the development of building societies across the world.

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The Future and Development of Building Societies

6 mins 54 secs

Overview

Building societies are great survivors, they have grown and evolved over time to become and remain as major retail financial institutions, providing strong competition to banks. However, they still face issues i.e. enhanced regulation such as higher capital requirements. Despite this, societies have retained their key characteristics, as institutions that specialise in retail savings and mortgage markets.

Key learning objectives:

  • Understand the role of building societies today

  • Outline the current challenges that building societies face

  • Understand how building societies have developed across the world

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Summary

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

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Sir Mark Boleat

Sir Mark Boleat

Sir Mark Boleat has held a wide range of board level appointments in the UK and Jersey. He is currently the Chairman of LINK, Eldon Insurance Services and the Governors of the City of London Academy Highbury Grove. Sir Mark is also Vice Chairman of the Advisory Board of the International Business and Diplomatic Exchange.

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