Abstract

Some scholars have posited that mutual banks have fewer incentives to engage in excessive risk-taking than joint-stock banks because of the unique structure of property rights in the former. This paper uses their theory as a framework to explain the divergent risk-taking behaviour of building societies between the pre-war and inter-war periods, and between large and small societies in the latter period. It is argued in this paper that the low risk-taking behaviour predicted of mutual institutions like building societies can only be expected of small, regional societies which were less exposed to competition than their larger, city-based counterparts which competed more aggressively for investor funds and mortgage business. In the inter-war period, increased competition between societies led to levels of risk-taking hitherto unseen in the movement, leading to calls by the movement’s leaders to consolidate the sector into the hands of a few large societies. This process of consolidation promised to benefit members and to improve the overall efficiency of societies in the movement. The actual experience however shows that these promises were largely unmet. Rather, it is shown that the only beneficiaries of firm growth were building society managers, who were able to extract higher pay from empire building.