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 taxpaye r pound 500bn in terms of the compensation paid out for the resulting scand als and failures. In contrast, the deregulation of UK building societies, a lthough initially followed by a series of scandals and losses of pound 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 mutualit y, many homeowners have had their properties repossessed, and investors bee n mis-soId unsuitable investments. However, UK building sociieties, by a mi xture of good luck and judgement, have avoided the principal regulatory pit falls, 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 anticipa te, respectively, the US experience.