Mutual banks – the anchor of our future stability?

A LabourList Report

The confidence in our banks and our banking sector has been severely diminished by the global financial crisis and subsequent recession, and to return to business as usual and not accept the lessons of the defining challenge of our time is no longer an option. The impact of the recession is yet to fully play out, but it’s clear that the crisis must lead to increased prudence and responsibility in our banks and markets.

With this opportunity to reshape our financial sector, it is important to refocus on the concept of safe and secure banks over the casino capitalism that brought about systemic risk and led directly to the crisis. So it was good to hear of some possible ways out of this mess at a Progress breakfast seminar this morning which was addressed by Michael Stephenson, General Secretary of the Co-op Party and John McFall, the well-respected Chair of the Treasury Select Committee.

The following points from the meeting were particularly relevant:

This is about finding new solutions to how the credit crunch affects ordinary people and ordinary lives which means we shouldn’t only spend our time kicking banks and bankers, but be positive and find virtue out of the credit crunch. Anger has to be harnessed and turned into something positive. This is a fertile time for that.

Therefore, the government could look for a quick sale of Northern Rock to show action and try to improve confidence in the markets, but the sale of that bank shouldn’t be about short term impact or stimulation of the markets. Rather it should be about creating a sustainable banking sector and financial services sector for the long term.

If we accept that mutual banks often reflect the values and principles of responsible lending, borrowing and investment because their operation and capital are controlled democratically by members, then thinking about whether Bradford and Bingley and Northern Rock might be taken back into some form of mutual model is a good place to start.

So why might the government think about mutuals now?

* They are more robust and better able to withstand crises due to their focus on longer term results over short term risk.

* They are good for society as a whole, stressing a better deal for customers and a better range of tailored services, mortgages and products. They are also customer focussed: there is no intermediary andno shareholders to please through profit.

* It is now, with this crisis, that we are feeling the impact of the demutualisation of the last Conservative government. It’s taken 20 years to put this issue front and centre, so this is a rare opportunity to return to that sensible banking.

* The government is putting forward a Financial Services White Paper which presents an ideal opportunity to consider greater mutualisation in the sector.

The demutualisation of the building societies under the last Tory government is one of the very worst things the government did for the long term stability of our economy. Every Building Society that demutualised in the 1980s either collapsed or was subsequently rescued. But if we are going to win the argument for more mutual banks, we need to ensure that the general public are re-educated about their benefits. Young people in particular don’t understand the concept of mutualisation, so we may need to rebrand mutual banks as not-for-profits.

This doesn’t mean that mutualism is the full answer to the banking crisis, but as a way of providing greater diversity in banking, mutuals could help to provide customers with a safer place to put their money. In full time we should expect to see a financial services sector of strong banks and traditional building societies, of flexible mixed models.

But to put this centre-stage, Labour activists will need to build a united campaign around mutual banks, and mutualism in general, as a way of rebuilding our fractured economy. With a general election not far away, these arguments need to be cemented into Labour’s policy programme for the next year and the next election.