Building Societies and the bail out of the collapsed banks

I still think very few people are aware that following the failure of Bradford and Bingley and the Icelandic Banks that it is the remaining UK deposit takers that fund the bail out, not the government as so many of the press have reported.

For example when B&B transferred its savings book to Abbey Santander, the retail funds required for the £18 billion worth of balances held by customers were simply not there. So a call was made on the Financial Services Compensation Scheme (FSCS) for all the balances covered up to the £35,000 limit as it was at the time. This was estimated to be £14 billion. The remaining (uncovered) £4 billion was funded by the treasury and therefore ultimately the tax payer.

The FSCS is funded by levies from the UK deposit takers, so we all have to pay. The irony is that the failed institutions relied heavily on wholesale funding markets which ultimately, significantly contributed to their demise, but the Building Society sector is heavily retail funded. Saffron Building Society in fact holds more retails savings balances than it lends in mortgages. Due to this the sector is now having to bear a greater percentage cost of the levy than the banks. This seems an unreasonable penalty for prudent policies.

Whilst for us the amount involved will not reduce our annual profits below acceptable levels, it will cost us in excess of £1 million from 2008 profits, with further amounts payable in future years.

Therefore I have today written to all of our local MP’s asking them to support an early day motion read recently by Ann Cryer MP.

Motion 426, Financial Services Compensation Scheme Levy on Building Societies, raises some very important concerns of both Saffron Building Society and the entire building society sector. I have provided a copy of the text of the reading below.

I don’t want this to sound like sour grapes, but building societies typically run more traditional and less complex business models than banks. We are naturally risk averse and prudent in looking after our member’s money and because of this our levies are disproportionately high……

I would love to hear your comments and whether you agree with the motion or not.

http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=37446&SESSION=899
That this House notes the disproportionate impact on building societies of the Financial Services Compensation Scheme (FSCS) levy, resulting from the failure of Bradford and Bingley plc, the Icelandic banks and London Scottish Bank; recognises that building societies' share of the levy, approximately £200 million per annum in each of the next three years, is equivalent to about 15 per cent. of the sector's pre-tax profit for 2007-08 financial year ends; notes that building societies' share of the levy for years beyond 2011 is uncertain, but could well be higher than £200 million per annum; acknowledges that the impact on building societies contrasts starkly with the banking sector, where the FSCS levy is typically well below five per cent. of pre-tax profits over a similar accounting period; further notes that the current allocation of the FSCS levy works to the detriment of building societies' members, their savers and borrowers; acknowledges that no building society has ever made a call on the FSCS or its predecessor schemes; and calls on the Government to introduce a more equitable scheme for funding the insurance of deposits of failed banks.