Mutuals to survive well in banking shake-up

Kate Barker, who recently rejoined the board of the Yorkshire Building Society, told the Yorkshire Post that the mutual model would "survive well in the new world".

The Government-commissioned inquiry into the sector confirmed at the weekend that it is considering plans to split retail and investment banking operations.

Ms Barker, a respected economist, said: "You don't want taxpayers to insure investment bank businesses, you have to have some way of dividing these risks from the household and commercial business."

She said building societies of a certain size would benefit from such a shake-up because "they are already less complicated institutions focused on retail lending and deposit-taking".

Instead of asking "what's going to bring the most profits", Ms Barker said mutually-owned organisations are focused on "what is going to be best for members" and how to balance the interests of savers and borrowers. Shareholders, meanwhile, tend to be "driven in a rather short-term way".

She said that mutuals have "a rational approach to taking risks" and added that "having a range of financial institutions is a good thing".

"It's instructive that many of the organisations which demutualised have not proved to be durable. Something was lost," she said.

Shares in Britain's biggest banks fell yesterday as investors worried that weekend comments by Sir John Vickers, chairman of the Independent Commission on Banking, could lead to subsidiarisation – when deposit-taking operations are ring-fenced from investment banking business.

On the issue of inflation, Ms Barker echoed comments by a current member of the MPC in the Yorkshire Post last week.

She said: "Like Paul Fisher, I don't regret any decisions we took as a committee." But she added: "Compared with when I left last May, I feel less concerned about the downside and a little more concerned about the upside risks with inflation."

Ms Barker blamed higher indirect taxes and strong rises in commodity prices for the higher-than-expected increase in inflation.

On the economy, Ms Barker said that GDP figures for the fourth quarter – out today – will be affected by the weather, so economists and politicians must wait until the first quarter figures to understand the real strength of the economy.

She said the UK would continue to see recovery and "growth for the year will probably be around 2 per cent", while 2012 will be a bit stronger.

It is "easy to get obsessed by the fiscal cutbacks, which are very severe", she said, but there is a "reasonably strong global recovery".

Ms Barker said UK exporters should be able to exploit this world growth, particularly while monetary policy remains "extremely expansionary" at 0.5 per cent.

Economic instability in Europe, where some UK financial institutions have exposure, could pose a risk to the UK economy by causing another credit crunch, but this is considered less likely after two quarters of strong growth and some successful capital raising by banks, she said.

Last decade, Ms Barker published an influential review of housing supply for the Labour Government in which she said the lack of new homes was causing high house prices in the UK.

Speaking about the current outlook, Ms Barker said all housing market predictions should be treated with "a major pinch of salt" but forecast a year of "relatively sluggish growth" and said "the underlying trend of low transactions is likely to continue".

Housing completions probably fell to a historical low last year and "it does not look like 2011 is going to prove more positive".

She said housing supply had not kept pace with underlying demand for the last two or three years, but she was hopeful that the new powers wielded by regulators should reduce the risk of another bubble based on an unsustainable easing in credit conditions. Ms Barker said places like London and Cambridge had seen only slight falls in house prices, while some Northern cities have seen much bigger declines.

She expects to see "greater divergence between the regions with the South East continuing to do relatively well but problems with some of the cities which were just turning around" before the recession, such as places like Stoke, Burnley and Hull. "It's hard to see them doing anything other than continuing to struggle," she said.

Ms Barker, 53, was on the board of Yorkshire Building Society for two years before stepping down in 2001 to join the MPC.

Key member of the MPC

Kate Barker served on the Bank of England's Monetary Policy Committee from 2001 to 2010.

Previously, she was chief economic adviser to the CBI and a board member of the Housing Corporation. Ms Barker, awarded a CBE for services to social housing in 2006, rejoined Yorkshire Building Society last November. Speaking at the time, chairman Ed Anderson paid tribute to her "extensive experience".