What price trust?

Over the weekend we had a number of people come into our branches with new deposits from the struggling Lloyds Banking Group. These new deposits were handed over with comments like “you guys are trusted” and “we know you, you are local”.

The bank shocked the City on Friday when it reported an unexpected £10 billion loss in HBOS, the lender it rescued last month after Government intervention, making it worth far less than thought when it was acquired.

Shares in Lloyds Banking Group fell 12 per cent this morning, after a 32 per cent plunge on Friday, as concerns mounted about them being forced to seek a fresh capital injection from the Government.

Politicians say the revelation will make it inevitable that the bank will be forced to seek a fresh capital injection from the state, or even be nationalised, leaving taxpayers facing billions of pounds of extra losses on their rescue of the banks.

This got me thinking about the capital model that banks use to support their business activities. All companies need capital; we need it to support the building society in terms of the mortgage lending we have done. The FSA require us to hold capital that would be used to pay for things such as credit losses in the event of bad mortgage debts. Banks are the same, but their capital is provided through their share value, whereas a building society actually has to have the physical cash.
Capital is really only needed to support organisations in bad times, but the trouble with a bank is that when times are bad their share price plummets and their effective capital is diminished.

I think we could see a few phoenixes emerge from these economic circumstances. They will be the new banks of the future. They will be different from the banks we know in lots of ways. Firstly they will be owned by their customers, rather than shareholders; they will have prudent limits imposed upon them to prevent them growing too fast; they will have to cut their cloth according to their size; they will have to already hold the cash they require to support future business aspirations; they will have to make a profit, but not too much at the expense of customer value and they will be run by boards accountable directly to their customers.

Sounds familiar, sound like a Building Society, which is probably why the Building Societies Association have just published data which confirms that Building Societies are on top for service, value and trust.

http://www.bsa.org.uk/mediacentre/press/service_value_and_trust.htm