TSB condemns privileges for building societies: Goodison urges Treasury not to handicap banks

TSB has launched an attack on the privileged position of building societies, urging the Treasury to reject pressure to make it easier for societies to borrow cheaply from the money markets, unless there are big reforms in the way they are run.

The onslaught by TSB, which lost to Lloyds in the courtship of Cheltenham & Gloucester, signals rising concern among banks about competition from societies. One result has been the takeover race, with Lloyds first out of the starting gate.

Sir Nicholas Goodison, chairman of TSB and president of the British Bankers Association, says in a memorandum to the Commons Treasury Select Committee that easier access for societies to money market funds would put banks at an 'unjustifiable competitive disadvantage to the detriment of shareholders and customers'.

There have been signals in recent months that the Treasury is likely to side with the societies' demands for greater freedom to borrow, with a rise from 40 to 50 per cent in the proportion of the funds they raise on the money markets. Officials are nearing the end of the first stage of a review announced in January. As money market funds are cheaper, this would help societies to compete.

Sir Nicholas says government restrictions on the use of money market funds should only be removed if societies give up the protection of mutual ownership, as Abbey National did. The largest societies reflect the theory of ownership and control by members less and less, he argues. They appear like companies, but without the checks and balances provided by shareholders in companies.

Greater use of money market funds and diversification into new business would lead to less reliance on deposits from members - and erode the principle of mutual ownership, Sir Nicholas says, urging a merger of building society and banking supervision to harmonise regulation.

The Treasury review, which arose from the Government's deregulation initiative, is also expected to recommend making it easier for societies to merge, convert to public companies or be taken over by outsiders.

But it comes too late to help the pounds 1.8bn Lloyds bid for C&G, which is being opposed by the Building Societies Commission in the High Court next month on the grounds that the methods of payment proposed are not allowed by current legislation. The commission says the law forbids the Lloyds cash payments to members who have been with the society less than two years, to borrowers and to non-members of the society.

This part of the Treasury review has been put on hold until the courts decide on the Lloyds offer. However, if the deal is blocked by the courts, the Treasury may liberalise the law anyway.

Like Lloyds, Royal Bank of Scotland, Bank of Scotland and Abbey National, TSB is anxious to buy a building society. BAT, the tobacco giant with big insurance interests that also tried to buy C&G, is thought to have looked at Nationwide. Despite a valuation by City analysts pounds 700m higher than the Lloyds bid, a counterbid for C&G from BAT is unlikely.

The Treasury said it had made no decisions on the first stage of its review, which was exploring the scope for further liberalisation of the building society regime. A spokesman said: 'We aren't going to be rushed. We will wait to see what the court decides.'