Coventry is a model of bank diversity

By Professor David Bailey of Coventry University Business School, Coventry Telegraph, Apr 11 2011

For more than 125 years, the Coventry Building Society has quietly got on with its business of being a mutual lender, enabling many people in Coventry and the region to achieve their dream of owning their own home, while offering good rates for savers.

This mutual approach delivered superior financial performance and value for members through the recent financial crisis. And unlike some other mutuals, like my own West Brom, the Coventry avoided getting sucked into dodgy commercial property investments.

Without many of us realising it, the Coventry has grown to become something of a mutual powerhouse. With 1.5 million members and over £21 billion in assets, it now ranks as the third biggest UK mutual. And unlike the profit-driven plc banks that were too-big-to-fail, the Coventry and other well-run mutuals offers us a model of how diversity in the financial sector can benefit all of us and not just the society’s own members.

That’s because a diversity of ownership types and business models can in turn help ensure diversity in corporate governance, in the risk appetite of banks, in incentive structures and bonuses, in policies and practices, and in organisations’ behaviours and outcomes, as Professor Jonathan Michie (of the UK’s Commission on Ownership) has consistently pointed out.

In other words, having a much bigger, more vibrant and well run mutual sector can offer a bulwark against financial contagion, especially when big shareholder-owned plc banks dominate and unbalance our financial system. Those big plc banks aimed to maximise financial returns for their owners (shareholders) – but ended up costing us all huge amounts in a taxpayer funded bail-out when their toxic ‘assets’ brought them down. Fostering such diversity is what I’d like to see as part of a wider set of reforms of the banking system. The Independent Banking Commission unveils its interim report today and all eyes will be on whether it will try to separate out casino investment banking from the utility banking we all depend on.

Such changes are critical for future stability but I’d go further still, with a greater commitment to having more diversity, with plcs, mutuals, and even state-owned banks all competing for our business – thereby giving us more choice.

And news that the Coventry is tentatively considering a bid for the ‘Good Bank’ part of Northern Rock plc should be welcomed. I’d still prefer Northern Rock simply to be remutualised, rather than being sold off to raise money for the government. But failing this, having the Coventry come in as a potential buyer could still strengthen the mutual sector and enable some decent competition to the plcs to emerge again. That, after all, should be a key plank of policy for our financial system.

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