Building societies today

Challenges and perspectives

Building society business has changed both in terms of existing contracts and new business. For old contracts that have reached maturity, a building and savings loan is requested much less often. This is understandable from the customer perspective. As an alternative, customers can get a cheaper credit at daily rates and continue to save into the savings and loan contract with its more attractive interest rates or even use it as collateral. From an economic point of view, there is a risk of adverse selection because customers who still request a savings and loan credit may have difficulties in obtaining a loan from another provider.

Building societies are maintaining their market share in real estate financing—and in some cases quite successfully—through granting a loan immediately without an earlier savings phase. Depending on the way this model is constructed, their business no longer differs in its economic substance from that of other real estate finance providers. It is impossible to predict to what extent building societies and their customers would return to their old business relationship if the interest rate environment changed—i.e. with higher interest rates which fluctuate significantly over time. Proponents of building society saving argue that savings and loan contracts offer similar terms to conventional real estate financing, but are much more flexible and that even customers who do not have a specific financing intention can still secure beneficial terms of credit in the long term.

Even though savings and loan contracts played a very special social role in the early years of the Federal Republic of Germany and financing behavior is subject to certain trends and fashions, one fact remains valid: financing contracts are signed first of all to achieve certain economic goals. The question must then be asked whether savings and loan contracts and the credit institutions who offer them actually help people to achieve their goals in the current environment.

There are many conceivable ways to find an answer to this question. An academic way could involve describing the particularities of the savings and loan contract using model theory and to determine whether it can be regarded as an efficient contract in an economic sense. In a second step, empirical evidence for this result should be sought. Alternatively, market participants could be directly questioned about whether and how savings and loan contracts benefit them. While the first approach requires considerable abstraction, the second approach appears overly subjective. This edition, with contributions from various authors, thus takes a middle, highly descriptive path. In the first chapter, the framework conditions for residential financing are described and savings and loan contracts are embedded in this context. The second chapter deals with the questioning of the concept of building society saving due to the low interest rate phase and its effects on savings and loan contracts. Finally, in the third chapter, possible modifications in building societies are discussed which could result from changes to the legal, market-related or technological framework conditions.

On the whole, the result is an overall picture where there are certainly shadows but also light and considerable perspectives if building societies manage to weather the temporary implications of the low interest rate phase and overcome the long-term issues stemming from tightened regulation. To do so, building societies must prove themselves to be dynamic and face up to the new challenges resulting from technological and societal change. They are not alone in facing these issues: in many industries, it is almost impossible to predict which business models will outlast the next few years. The evident economic worth of savings and loan contracts provided by building societies should however be sufficient to give building societies a fair chance in this competition of shaping financing relationships.

By Prof. Dr. Hans-Peter Burghof and Prof. Dr. Stefan Kirmße
2018. 160 pages, hardcover, EUR 48.-
ISBN 978-3-8314-0885-6

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