Depositors:not Shareholders

LONDON -(Dow Jones)- A group of U.K. lenders that are owned by their depositors rather than shareholders Sunday urged the government not to sell Northern Rock to a bank, but to return it to its mutual roots. Until 1997, Northern Rock was a building society, a type of U.K. lender that is owned by its depositors. Like many building societies during the 1990s, in that year it chose to become a bank. But in September 2007 it became the first U.K. deposit taker to experience a run in 150 years, and was finally nationalized in February 2008. The government went on to acquire a 70% stake in the Royal Bank of Scotland Group (RBS) and a 43% stake in Lloyds Banking Group PLC (LYG) after the collapse of Lehman Brothers led to an intensification of the financial crisis later that year. Leading U.K. policy makers have acknowledged there were weaknesses in the structure of the nation's banking system ahead of the financial crisis, conceding it had become dominated by a small number of large institutions, and was lacking in competition and a diversity of business plans. The Building Societies Association said returning Northern Rock to the mutual sector would help make the financial system more diverse, increase competition, and lower its risk appetite. However, it would not bring the government an immediate payment that it could use to reduce the national debt, as a sale to an existing bank would. The BSA said the benefits in terms of strengthening the financial system outweighed that negative, although a government desperate for revenue may not see it that way. "Given that remutualization 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," said Adrian Coles, director-general of the Building Societies Association. The BSA's call was supported by John McFall, an influential Labour Party lawmaker who chairs the House of Commons' Treasury Committee. "If ever there was a time for an expanded mutual sector, it's now," McFall said. "We desperately need to restore faith in financial services in this country." Increased mutualization of the financial system may also find support at the Bank of England, which is responsible for ensuring the stability of the financial system as a whole, as well as setting interesting rates. In a speech earlier this month, the central bank's executive director for financial stability said shareholder ownership may not be the best governance model for deposit takers since shareholders can only lose what they have invested. "That provides a natural incentive for owners to gamble, pursuing high risk/high return strategies from which they import the return upside but export the risk downside to depositors or the public sector," Andrew Haldane said. Instead, he said the model of mutual ownership traditionally employed by the U.K.'s building societies may be better.