Peter Griffiths ponders the sale of Northern Rock into the private sector
The announcement of the sale of Northern Rock to Virgin Money is a bittersweet moment for all those in the mutual sector. On the plus side de-nationalisation is a positive step. However, the alternative of a return of Northern Rock to the mutual sector after 14 years absence would have been very welcomed. We should not forget that Northern Rock had over 100 years as a successful building society, but only 10 years as a PLC bank before the queues formed outside its branches.
Mark Hoban, Financial Secretary to the Treasury, recently stated that, “if the future of financial services is really to flourish, it must be backed up by the strength and sustainability of financial mutual.” That currently seems more like rhetoric rather than reality since, in effect, the absence of an available capital instrument for the building society sector precluded re-mutualisation unless the government were prepared to retain a longer carried interest in Northern Rock. It will be fascinating to see how the Virgin deal unwinds. My sense is that whilst a full price has been paid for the asset, the taxpayer may lose out over time against the feasibility of a longer-term project to create a re-mutualised building society.
The Chancellor insisted that a “good deal” had been struck with Virgin. However, we should remember that the sale only encompasses what was called the good bank of Northern Rock. Meanwhile, a substantial part of the original business that is the bad bank, still sits in government hands and that book will be collected out over time. Only time will tell what real level of risk lies in this lending book.
We can speculate whether the sale is the start of a process to return taxpayer owned banks to the private sector, but in reality further progress in this regard seems highly unlikely against current market conditions. Government still owns substantive share holdings in both Royal Bank of Scotland and Lloyds, and with bank shares trading at substantial discounts to book value it feels unlikely that further early exits can be made.
Over the last few years, many entrants have attempted to move into financial services, the majority without success. The reality is that this is a harsh market place to play in.
Set against a backdrop of European turmoil, UK banks wait with bated breath to see what may unfold. For many, facing much tougher regulation, in particular in the areas of capital and liquidity regimes, the simple thing to do will be to hunker down, retreat or hibernate until the world looks nicer in some future spring. Balance sheet shrinkage may be a good short-term strategy to help restore your key trading ratios – but this does little to support the economic recovery or social justice agendas.
It is worth noting that building societies represent a pre-existing template for many of the reforms for the future structure of UK retail banking, as set out in the recent Independent Commission on Banking review. A retail ring fence will be implemented which will force the major banks to act more like building societies and that will have ramifications, not only for existing players, but also for new entrants like Virgin in the areas of product, price and service delivery. I would expect Virgin to try and differentiate their proposition on service rather than price.
We have already seen the implications of this new world unfolding and my expectation is that free if in-credit banking – if ever there was such a thing – will implode and the economics of the current retail banking model will shift. Financial advice for those at the lower end of the savings market or investment range will disappear as transparency of charges and a harsher conduct of business regime force providers to make tough choices. This will likely lead to the law of unintended consequences operating to full effect. My clear view is that financial exclusion is a key risk for those who most need financial advice but are least able to access or afford it.
I recently read in the Financial Times that a protestor’s banner outside St Pauls carried the comment that “Capitalism should be replaced by something nicer.” Having reflected on that I contemplated setting up a tent nearby with a banner adding, “Mutuals might just be the answer”.
Whilst the protestors’ messages may be incoherent they do seem to reflect a widespread mood which is looking for change. We are facing a larger social disconnect, trust is in short supply, not only in bankers but more generally in business, politics and the media. As the economic recovery slows society will continue to ask whether more of the same is a good enough response to the current crisis and its ramifications. As we rightly focus on the future, we should not forget our past. My own society – the Principality – founded just over 150 years ago was built on the foundations of its core values of industry, economy, thrift, perseverance, providence and temperance. It seems these are as relevant today as ever.
There is now less diversity than ever in financial services. While the purchase of Northern Rock by Virgin should largely be welcomed, the challenge of making it a success should not be underestimated.