Building Society behaviour 1975 to 1986 : objectives, branching and merger

• Main Author: Hughes, J.
• Published: University of Cambridge 1989
• Subjects: 332
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.604732

The behaviour of building societies is investigated to identify how and why it changed between 1975 and 1986. The period under study is one in which considerable changes occurred in the structure and operation of the industry and in societies' product markets. The research concentrates on three key aspects of building society behaviour: objectives, branching and merger. Objectives are a central theme because they not only form the foundation for building society policy, but also reflect the managers' perceptions of their own society's position within the industry, and of the industry's position within the savings and mortgage markets. Branching and merger are studied in detail because of their impact on the financial performance and operation of individual societies, and because of the importance attached to them by observers of the industry and indeed by managers themselves. The investigation of objectives, branching and merger brings together qualitative and quantitative information. This is used to describe industry-wide trends and to analyse the behaviour of individual societies. Hypotheses on the geographic and economic aspects of societies' behaviour are also tested and evaluated. The main conclusions of the research are summarised below. 1. Objectives. Building society objectives are shown to be directly affected by the environment in which they operate. The intensification of competition in the societies' traditional product markets after 1980 is found to be the principal factor which caused societies to alter their objectives from growth to growth at reasonable cost ('profitable growth'). It is also found that societies generally pursued secondary goals under both the cartel and under competition, though these varied from one society to the next. A further development associated with the intensification of competition is found to be the introduction of corporate plans after 1980. These plans included targets for growth rates, profitability and reserve ratios. 2. Branching. For individual societies the efficacy of using branching to meet changing goals is found to depend on three main factors: the maturity of their network, the degree of saturation in the area in which they are prepared to branch and the strength of external constraints. Also, evidence of over-branching across the industry is found, and the managers' claim that branches were located in order to tap the savings market receives only limited support. 3. Merger. The role of merger in meeting societies' goals is found to vary from one group of societies to the next. For the very largest and smallest societies, merger is found to have been of no real significance. Differences are also found between the behaviour of societies under the cartel and under competition. No quantitative evidence is found that merger increased a society's capacity to grow organically. Instead the mere addition of assets is concluded to have been the only real gain. At the same time, it is shown that only a relatively small number of societies made significant asset gains from merger. However, evidence is presented to show that acquisitions were often made for geographical reasons rather than purely economic ones. Economies of scale are not found to have existed for the period of the cartel. However, evidence is presented which indicates that the larger societies were becoming more efficient than the smaller ones after the break-up of the cartel. The apparent absence of economies of scale during the cartel is considered to have reflected the lack of pressure on managers to realise them, rather than the fact that they were not available.