Government should remutualise Northern Rock

1 October 2009 | News, Research and publications

A report published for the Building Societies Association (BSA) reveals a strong case for converting failed banks into mutual organisations and urges the Government to consider seriously returning Northern Rock to the mutual sector.

The report, written by the Centre for Mutual and Employee-owned Business at the University of Oxford, concludes that there are three economic arguments for a mutual sector of critical mass as part of a mixed financial system: bio-diversity, risk appetite and competition.


The more diversified is a financial system in terms of ownership and governance structures and portfolio make-up, the better it is able to weather the strains produced by the normal business cycle.

Mutuals, which are not owned by investing institutions, can counter-balance the short-termist pressure of the City. Mutuals also play their part in reducing the concentration of financial sector resources and employment in the City, dispersing wealth and welfare to regional and local economies.

Risk appetite

Mutuals tend to adopt a lower risk profile both because their objective is safety and fair pricing for members, not profit extraction for shareholders, and their main source of capital is that generated within the business, which is not easily replaced.


Keeping a reformed Northern Rock independent of the big banks is good for competition. As a mutual committed to its core business, a remutualised Northern Rock will help the Government to meet its policy objective of supporting competition and diversity through the maintenance of a strong mutually-owned financial sector.

Repaying the taxpayer

In any exit process the Government needs to realise the optimum value for the taxpayer. A re-launched and re-mutualised Northern Rock can pay for the taxpayer stake over time. A deferred payment profile can give the optimum outcome, both returning the full value to the taxpayer but also achieving other public policy goals.

Commenting on the report,

Jonathan Michie, Professor of Innovation and Knowledge Exchange at the University of Oxford and primary author of the report, said:

‘We must not allow the UK’s financial services sector to return to the ‘business as usual’ model that has proved so costly to the economy and public finances. Already we are seeing a return to the bonus culture. This is fuelled by profits boosted by the increased market power of banks. It is vital that the banks face competition from mutual building societies. That would also reduce the risk of the credit crunch being repeated. Remutualising Northern Rock would thus deliver to consumers and taxpayers.’

Adrian Coles, Director-General of the Building Societies Association, said:

‘The Government has said that financial mutuals can provide a robust alternative to financial services companies in the future – what better way to demonstrate this than to considering returning Northern Rock to the mutual sector?

Given that remutualisation would strengthen competition and create a more diversified financial sector, it could be expected to generate an advantage to the taxpayer over the long run in excess of the immediate benefit of any capital proceeds in the short run.’

Read the report