The consequences of deregulation: A comparison of the experiences of UK building societies with those of US Savings and Loan Associations

It has been estimated that deregulation of US S&Ls will cost the US taxpayer ￡500bn in terms of the compensation paid out for the resulting scandals and failures. In contrast, the deregulation of UK building societies, although initially followed by a series of scandals and losses of ￡1bn., eventually resulted in substantially increased profitability. The social effects in the UK have been quite different to those in the US. As a result of the increased importance placed on profitability as opposed to mutuality, many homeowners have had their properties repossessed, and investors been mis-soId unsuitable investments. However, UK building societies, by a mixture of good luck and judgement, have avoided the principal regulatory pitfalls, which beset the S&Ls in terms of bankruptcies and fraud. This paper seeks to explain these different post-deregulation experiences. It extends to the UK the looting model of Akerlof and Romer (1993) and the managerial diversion model of Nichols (1972) which went so far to explain and anticipate, respectively, the US experience. This revised version was published online in July 2006 with corrections to the Cover Date.