Money held in building society accounts fell by £800m

Published 05th Jan 2010

• Building societies bemoan competition from state-owned banks

• Northern Rock stripped of toxic loans has deposits worth £19bn


Building societies have complained that they had lost £800m in deposits from investors because of unfair competition from taxpayer-backed institutions as speculation swirled about the possible sale of the cleaned-up nationalised Northern Rock.

The Newcastle-based lender, along with National Savings & Investments, is one of those which the building societies argue are impeding their growth and luring savers through high rates or special protection for customers.

The Building Societies Association has complained about rates offered by NS&I and is pressing the government to withdraw the blanket guarantee for all savings at Northern Rock to bring it in line with other institutions where only the first £50,000 of savings is guaranteed. NS&I withdrew a savings product in November after 24 days because of the high level of deposits it attracted.

Northern Rock, which formally split into a good and bad bank , will receive three months notice from the Treasury about the withdrawal of the guarantee which was put in place to stall the run on the bank which took place in September 2007. The government is reviewing the guarantee and is expected to withdraw it shortly although savers who already have fixed term products from the bank will benefit from the guarantees for the life-time of their deposit.

The new Northern Rock plc has £19bn of savings and £10bn of mortgages and is regarded as a possible target for Virgin Money, which is awaiting a banking licence from the Financial Services Authority, or National Australia Bank which already owns Clydesdale and Yorkshire banks. Northern Rock Asset Management will hold £50bn of more troublesome mortgages and is exploring a possible link up with the home loans business of part-nationalised Bradford & Bingley.

UK Financial Investments, the body which looks after the taxpayer stakes in the bailed out banks, is yet to appoint advisers to handle a sale of either business but this has not prevented speculation about a disposal before the general election. With most predictions for a polling day on 6 May, the prospects of a deal before then are regarded as slim, City sources concede.

The BSA admitted it had lobbied the Treasury about products being sold by NS&I, which also infuriated Nationwide in November.

The BSA said the £800m of savings withdrawn from building societies in November contrasted sharply with the same period a year ago – at the height of the banking crisis – when deposits worth more than £600m flowed into the societies.

Adrian Coles, director general of the BSA, said: "Building societies and other deposit takers face heightened competition from institutions with a government guarantee creating distortions in the savings market. In particular, National Savings offered a product in November which is likely to have resulted in substantial withdrawals from private sector institutions, including building societies".

He noted that the low savings rates made it difficult to attract investors who were using their cash to reduce debts or invest elsewhere. Attracting savers is crucial for building societies as their deposits are used to provide loans to prospective home owners. In November, net lending by societies was minus £543m which means that more home loans were paid off than taken out and against £412m of new loans granted in the same time last year.

NS&I tried to reassure the market that its sales push in November would not need to be repeated. Jane Platt, chief executive of NS&I, said the body, which holds £96bn of savings, was on track to meet its government target of zero growth in 2009/2010. To achieve this goal NS&I must attract £14bn of savings during the year because of the size of withdrawals. The pre-budget report last month showed that its balance was down £500m on a year ago, in line with its targets.

Source: ' Guardian '

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