Why mutuals may ride out the storm

Gone are the days when money was easy to come by and it seemed that every niche sector had a mortgage tailored to its needs.

Now the harsh reality of an economic re-balancing - prompted in part by the credit crunch - has helped to highlight the shortage of cash in the system as financial institutions vie for what money there is available.

But where is the money coming from and what does it cost the financial institutions to get it?

The problems with wholesale markets are well documented and the fact that they are increasingly constrained has turned the focus of the banks and building societies to gathering retail funds. In particular, it has spurred some financial institutions to compete aggressively in a market that was once much more stable and predictable. With interest rates on offer to savers of in excess of 7 per cent against a backdrop of a Bank of England base rate at 5 per cent, the question on everyone's mind has to be why.

The answer is, of course, a pursuit of new money that certainly in the short term is required to meet lending commitments or substitute previously obtainable wholesale funds. This in turn has a knock on effect of causing other banks - and building societies - to raise the rates they offer on their savings products in an attempt to maintain their balances, which in many cases have been built up over decades of service to loyal customers and members.

As the rates being offered to attract savers so graphically demonstrate, this pursuit of new money through retail funding has not turned out to be easy, and certainly not the simple alternative to wholesale funding that some had perhaps hoped it would be. In fact, the increasingly competitive nature of the market is increasingly making the option less attractive and there is a need for a different approach to be taken.

This situation is exacerbated by the fact that the amount of retail funds available to the market as a whole, whether it is new or old money is also gradually being eroded by the impact of rising costs. This additional squeeze on the pockets of both the consumer and business sector is reflecting a global increase in costs for elements as diverse as food, fuel and power.

Institutions need to think carefully about their growth strategy in the next few years. Is it right for example for a building society to fund growth in lending by paying top rates to attract new money, which could just as likely move away again in search of even "better buys"?

My view is that building societies, with their business model based on mutuality and no requirement to satisfy shareholders, have slightly more freedom in the approach they can take. Indeed, building societies have in general also been less exposed than some institutions to the credit crunch and as a result can perhaps ride the storm by constraining their growth and possibly even profits, rather than pursue a higher risk strategy of fund and grow at any cost.