The position of building societies relative to retail banks

The rationale for the 1986 Building Societies Act was that the building societies should be allowed to engage in a wider range of Financial services, including forms of lending and sources of funds. This was perceived as being necessary because if they were restricted to their original activities they would not be able to compete with other financial institutions and hence their share of the retail financial services market would inevitably decline. The changes brought about by the 1986 Act have caused the majority of building societies to be­come much more generalised retail financial services organisations.

However, as we noted above, restrictions remain on what building societies can do, and some of these — particularly the restrictions on the extent of lending other than as Class 1 assets and the extent of wholesale funding - are seen by some as being prejudicial to the future prosperity of building societies.

As a consequence of the 1986 Act there has been a substantial convergence of the retail banks and the building societies in the field of retail financial services for the personal sector. Several of the larger building societies are members of the clearing house system, offer interest-bearing current accounts, personal loans, overdraft facilities and credit cards, as well as several of the non-banking services permitted under the 1986 Act. One society (the Alli­ance & Leicester) bought Girobank - although it is highly likely to become a bank itself in 1997. Also, the Cheltenham & Gloucester still operates as a separate entity to that of its owner - Lloyds Bank.

Outside the personal sector, however, this convergence of retail hanks and building societies has been very much less. A significant proportion of retail banks' lending is to the corporate sector, compared with only a tiny propor­tion for building societies. In addition, the retail banks offer a diverse set of services to the corporate sector. The retail banks are also involved in interna­tional activities to a substantial degree, whereas the building societies have virtually no involvement.

Part of the remaining differences between building societies and retail banks is, of course, due to the different regulatory frameworks involved. Given that the convergence of activities of separate institutions over time tends to iden­tify anomalies in the regulatory frameworks, it is likely that increased harmonisation of these frameworks will occur, and that further convergence of activities will result.

1. What is the primary purpose of building societies?

2. What was the importance of the Building Societies Act 1986 to building socie­ties' lending activities?

3. State the advantages to a building society of converting to pie status.

4. Examine the disadvantages to a building society of converting to pie status.

5. How did the Building Societies Act 1986 affect the range of financial services which building societies are allowed to offer?

6. List the ways in which building societies have converged with retail banks in recent years.

7. Describe the areas of activity in which building societies and retail banks are still markedly different.

VIII. Analyse the following charter:

IX. Make an overview of the following text in English:

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