What Is a Building Society?
A building society is a type of financial institution that provides banking and other financial services to its members. Building societies resemble credit unions in the U.S. in that they are owned entirely by their members. These societies offer mortgages and demand-deposit accounts. Insurance companies are often major supporters.
- Building societies provide banking and other financial services to their members.
- They are similar to credit unions and savings and loan institutions, but their members are typically those in construction trades, real estate, or co-op housing.
- Building societies are conservative in their approach to investment and savings as compared to banks or other financial institutions.
Understanding Building Societies
Groups of co-op savers in the building trades first introduced the term "Building society" in 19th-century England. These institutions are now major competitors of banks in the U.K. and are the equivalent of U.S. savings and loan institutions. Building societies can also be found in other countries, such as Australia, Ireland, and Jamaica.
Building societies are different from banks. The latter are generally listed on stock exchanges and accountable to stockholders. On the other hand, building societies are cooperative groups, completely owned by their members, each of whom has a vote. Building societies in the U.K. are also not allowed to raise more than 50% of their funds from wholesale markets. On the other hand, banks have a diverse array of funding societies from open markets to bond issuances to investment in commercial markets. Some have argued that this is a significant advantage that banks have over building societies.
That said, some building societies also made the same irresponsible investment decisions as banks during the financial crisis and had to close down or be rescued from bankruptcy. The number of building societies in the U.K. has declined from a high of 55 in 2008 to 43 in 2019.
Building societies have a particular focus on savings and mortgage lending. Mortgage lending is the act of lending a debt instrument that a specified real estate property secures in the form of collateral. A borrower is obliged to pay back this collateral with a predetermined set of payments. Mortgages can help individuals and businesses, who buy into a building society, make large real estate purchases without paying its entire value upfront. Over a period of several years, the borrower will repay the loan for the property, plus interest, until it is eventually owned free and clear.
Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the building society may foreclose on it.
Building Societies vs. Credit Unions
Members (or a "mutual") entirely own the 43 building societies and six credit unions in the UK, which is similar to the structure of credit unions as known in the United States. More specifically, credit unions can range in size from small, volunteer-only operations to entities with thousands of participants. Large corporations, organizations, and other entities may form credit unions for their employees and members.
Most credit unions follow the basic business model of members pooling their money via purchasing shares in the cooperative. In exchange, they receive the ability to request loans, open demand deposit accounts, and obtain other financial products and services among each other. Any income generated generally goes towards funding projects and services that will benefit the community and interests of its members.
In some cases, credit unions can be at a disadvantage to larger banking institutions if they have fewer brick-and-mortar locations to service clients who like to transact in-person. Most credit unions will offer online banking and auto-bill pay but rarely at the level of T.D. Bank (one of the big six banks in Canada), for example.
Examples of Building Societies
Nationwide was the biggest building society in the U.K. in 2019 based on the number of assets owned, followed by the Coventry and Yorkshire financial institutions. Skipton and Leeds rounded out the top five building societies. These groups compete with each other on the same parameters as other financial institutions, such as interest rates and number of withdrawals.