The Difference Between a Building Society and a Bank
Sep 30, 2007
The near collapse and subsequent nationalisation of Northern Rock plc has highlighted the difference between banks and building societies more clearly than ever before. Northern Rock was once a building society but converted to a bank in the 1990’s to diversify from its traditional building society operations. It grew at exceptionally high levels, using more and more money borrowed from other banks, building societies and other institutions. However, the supply of money between institutions has become more restricted and as a result Northern Rock faced severe liquidity problems.
The main difference between banks and building societies is the way in which they are funded, or allowed to be funded. Building Society law states that no more than 50% of its funding can come from wholesale (other banks, building societies etc) sources whereas there is no such restriction on plc banks hence Northern Rock had around 75% of its asset base borrowed from other institutions.
Building societies do borrow from each other and from banks but the limits are strictly controlled and in most cases are significantly below the 50% level. Beverley Building Society is delighted to announce that it has no wholesale borrowing whatsoever and nor has it held any for three years. Another important difference is the type of mortgage lending undertaken and again it is reassuring to be able to report that the Society has not entered into any high loan to value lending with no new loans having been made which exceed 80% of a property’s value at any time within the last five years.
Had Northern Rock remained a building society, it would not have been able to put itself in the position it found itself in and customers queuing outside their offices would not have had the worry and anxiety that the events caused. This is the essence of why building society’s are regarded as an important, trustworthy alternative to the banking sector.
