British `building societies' fare better than S&Ls in US

In the United States, they are known as savings-and-loans. In Britain, they're called ``building societies.'' While the names are different, the once comfortable, dependable - and staid - British building societies are undergoing a difficult evolution that in many ways is similar to the wrenching experience of S&Ls in the US. Both have relied traditionally on the huge middle class for savings deposits that in turn became home mortgages for that same group of solid customers. And both have seen deregulation threaten the very foundation of their enterprise.

But the building societies, with the help of a strong national network of branches, a very loyal customer base, and new government legislation that allows them to offer many new services, say they will be able to carry on with few of the problems that have beset the S&Ls.

``Because the problems in Britain were far less severe than in the States, the deregulation has been less apparent,'' said Adrian Coles, an economist at the Building Societies Association, a trade group. ``American S&Ls have fixed-rate mortgages with variable-rate deposits. When interest rates rose in the late '70s and early '80s, the rates they had to pay to retain deposits went up, but they could not recoup that by increasing mortgage rates.''

``Basically the advance we have,'' said Robert Moffat, assistant general manager of Nationwide Anglia, a newly merged building society with 20 billion ($35.6 billion) in assets, ``is that we're able to operate nationwide or nationally. That was never the case in the US.''

But like savings-and-loans in the US, British building societies have faced stiff competition for the retail savings and home mortgage market from banks and ``new lenders'' that have entered the mortgage markets with a fury, experts say. In less than two years' time, the societies' share of the home mortgage market has plummeted from a high of 90 percent to about 54 percent, says Stewart Gowans, spokesman for Abbey National, the second-largest building society here, with 25 billion ($44.4 billion) in assets.

Banks and mortgage companies lured the society's traditional customers with aggressive advertising and lower mortgage rates. Banks were able to offer lower rates, because they raise funds from wholesale money markets, whereas building societies are allowed to raise only 20 percent of their funds that way.

``The competition isn't really even,'' Mr. Gowans said. ``Most of our money has to come across the counter,'' whereas it is ``historically cheaper'' to go to the wholesale markets.

For that reason, building societies are pushing for an amendment to the 1986 Building Societies Act that will raise their wholesale funding limit to 30 percent.

To cope with the competition, building societies won the right to enter new markets. The 1986 act gave them the right to make unsecured loans up to 5,000, offer checking accounts and foreign-exchange services, purchase stock brokerages and real estate agencies, manage land, and build houses.

It also allowed them to act as agents on mortgage investments with foreign banks, and to enter into financial agreements with insurance companies to arrange life insurance, personal insurance, and personal pensions. The catch is that building societies cannot advise clients on investments, pensions, or insurance.

Nationwide Anglia took advantage of the new act by buying 400 real estate offices, giving the firm Britain's largest real estate chain, and going into partnership with the stockbroker Hoare Govett, owned by the American bank Security Pacific. The firm also offers checking accounts that pay interest on as little as one pound.

Sticking to the financial services market will ensure the future for building societies, those interviewed said. ``Some of the new areas that the American S&Ls are going into, they're losing money because they had no experience in that area and their problems were compounded,'' said Mr. Coles. He cited the S&Ls' going into fast food and real estate development as two examples.

All those interviewed said they would like more freedom to compete in the financial services market. But others worry that building societies will disappear as traditional providers of mortgage loans and become banks.

``We are trying to thrive without changing to banks,'' Coles said. ``I don't think we want to be forced to float on the stock market.... We're not going to start making loans to Brazil and Argentina. We're not going to start making loans to large corporations. That's not where our skills are.''