With banks suffering unprecedented losses, there is a lot of interest and speculation about the safety of banks and building society deposits.
Firstly, the government guarantee the first £50,000 of savings (and there is pressure to increase this amount). In practise, the government wouldn’t let a bank / building society go under leaving savers out of pocket.
Also, the building societies who didn’t demutualise and become banks, generally have a good business model.
Building societies are governed by stricter legislation meaning they have limits on how much funds they can raise on the money markets. This restricted their involvement in the securitised loan funds which have caused so many black holes in bank balance sheets.
Secondly, building societies are owned by their members and not share holders. Therefore, there is no share price to attack. – Like HBOS and others have suffered.
Generally speaking, whilst the banks overstretched themselves in the boom period, building societies stuck to traditional business models of lending mortgages out of savings.
Building societies were less likely to get involve in 100% mortgages, buy to let mortgages and self certification mortgages. Therefore, as house prices fall they are better insulated against negative equity. Building societies tend to have low loan to value %. Typically, the value of their loans are about 40-44% of their building securities.
They also have very low mortgage default ratios. For example, the third largest building society Yorkshire, has a home repossession ratio of 0.09%. Nationwide the largest building society is responsible for 13% of all UK mortgages, but accounted for only 1% of mortgage defaults
Finally, building societies have benefitted from a rush of deposits as nervous savers look to the relative safety of building societies.
The great irony is that the building societies which rushed to demutualise in the early 2000s, have been the ones hardest hit. – Northern Rock, Bradford & Bingley, HBOS and Alliance & Leicester
It sounds a rather rosy picture for the building societies. However, they will not be immune from deteriorating economic conditions and the general credit crisis. Like in the last recession, there is likely to be further concentration as some of the smaller building societies get swallowed up by the bigger.
However, if you have savings in a building society it is probably as safe a place as any at the moment.
List of Building societies in UK – Top 10
