We value the role of building societies owned by their customers and the strength and diversity that a healthy mutual sector brings to our financial services, and we will consult on measures to help strengthen the sector. As one option for the disposal of Northern Rock, we will encourage a mutual solution, while ensuring that the sale generates maximum value for money for the taxpayer.

Labour Party Manifesto, 2010 (emphasis added)

I’m not convinced by Labour’s manifesto proposals for Nothern Rock. While mutuals are in vogue, and may have a place in the banking sector, turning the Rock into a mutual is unlikely to achieve maximum value for the taxpayer.

Turning Northern Rock into a mutual would involve a transfer of ownership, rather than a sale of the asset. Upon transfer of ownership, the Government would become a creditor of the new mutual and, presumably, some sort of loan repayment schedule would be instituted. However, mutuals are supposed to be low risk, low profit institutions, and at least some of the profit generated from the mutual’s activities would have to be used to reinvest (on capital expenditure, for example).

So the Government would receive small annual repayments of the debt incurred acquiring the assets of NR. A report for the British Building Society Association last year claimed that a benefit would be a more competitive banking sector, and diversity in retail banking provision.

In net present value terms, I’m not sure that an extended stream of repayments would necessarily be better for the tax payer than a straight asset sale in the short term – discounting a long stream of small payments is likely to result in a small number. Added to which, the ongoing cost of financing the bail out of Northern Rock is likely to rise over time as interest rates increase and the government refinances its current debt stock. The national debt may be better served by an asset sale in the short term.

Of course, there may be indirect benefits from plurality in retail banking supply – lower costs to government in future, for example – but these are more difficult to assess. And I’m less sure than the authors of the BSA report that mutualisation will result in increased competition (and hence more consumer welfare) than a straight asset sale – there appear to be many potential institutional investors keen on launching retail banking operations in the UK marketplace (Virgin, for example).

This is not to say that policies which are mutual-friendly should be discouraged. It’s just I’m not sure in relation to Northern Rock it represents the best deal for taxpayers.