Page last updated at 16:31 GMT, Sunday, 27 September 2009 17:31 UK

Northern Rock 'should be mutual'

Man passes a Northern Rock branch
Northern Rock still owes the government nearly 11bn

The government should return Northern Rock to its mutual status rather than sell it to a rival or re-float it on the stock exchange, says a report.

The Building Societies Association says different ownership structures for banks both benefit the economy and improve competition.

It adds that mutuals take less risk than banks owned by shareholders.

Northern Rock was nationalised in early 2008 after becoming the first victim in the UK of the credit crunch.

'Restoring faith'

"A financial system with diverse ownership and governance structures is better able to weather the strains of the business cycle than one which is plc-dominated," the report says.

Mutuals can provide balance against the "short-termist pressure of the City" and help "to disperse wealth to regional and local economies", it adds.

They also reduce risk because their primary objective is "safety and fair pricing for members, not profit extraction for shareholders."

The report also states that a re-mutualised Northern Rock would be able to repay the taxpayer for the government bailout last year "over time".

The Northern Rock still owes the government nearly £11bn.

"This is a timely contribution to the debate on the future of our financial services sector," said John McFall, chairman of the Treasury Select Committee.

"If there was ever a time for an expanded mutual sector, it's now. We desperately need to restore faith in financial services in this country."

Jonathan Michie, Professor of Innovation and Knowledge Exchange at Oxford University and the primary author of the report, said " We must not allow the UK's financial services sector to return to 'business as usual'.

"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 banks face strong competition from mutual building societies.

"That would reduce the risk of the credit crunch being repeated."

Mutual building societies are owned by their members, not by shareholders, and are run for the benefit of those members.

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