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'The Paradox of Success': The Effect of Growth, Competition and Managerial Self-Interest on Building Society Risk-Taking and Market Structure, c.1880-1939

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  • Luke Samy

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 mutual firm. This paper uses their theory as a framework to explain the divergent risk-taking behavior of building societies between the pre-war and the 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 financial 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.

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  • Luke Samy, 2011. "'The Paradox of Success': The Effect of Growth, Competition and Managerial Self-Interest on Building Society Risk-Taking and Market Structure, c.1880-1939," Economics Series Working Papers Number 86, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:number-86
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    File URL: http://www.economics.ox.ac.uk/materials/papers/4817/samy86.pdf
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    References listed on IDEAS

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    1. Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
    2. Smith, Bruce D., 1984. "Private information, deposit interest rates, and the `stability' of the banking system," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 293-317, November.
    3. Rasmusen, Eric, 1988. "Mutual Banks and Stock Banks," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 395-421, October.
    4. J. Bradford De Long & Richard Grossman, 1992. "Excess Volatility on the London Stock Market, 1870-1990," J. Bradford De Long's Working Papers _133, University of California at Berkeley, Economics Department.
    5. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
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    Cited by:

    1. Bernardo Bátiz-Lazo & Mark Billings, 2012. "New perspectives on not-for-profit financial institutions: Organisational form, performance and governance," Business History, Taylor & Francis Journals, vol. 54(3), pages 309-324, June.

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