Are Building Societies safer than Banks?

chris1

Are Building Societies safer than banks, and if so, why?

Have the current worries about Northern Rock, Alliance & Leicester and Bradford & Bingley just come to light because they have shares and are therefore more visible, how do we know how safe building societies are, and which are safer than others?

dwsjarcmcd

In my view yes, simply because they are not allowed to raise as much money on the wholesale markets as banks. For example the Nationwide and Yorkshire only raisde about 25% of their finance from these markets, as opposed to the 70% that the Rock did. Obviously they are at the extreme, but many banks have a higher exposure than building societies.

purch

Are Building Societies safer than banks, and if so, why?

Not necessarily

Historically Building Societies have been more prudent than Banks, and as they don't have shareholders to look after they probably are still more prudent and less likely to engage in 'riskier' Investments

But there is no guarantee that some or all of Building Societies don't have a few 'skeletons in their closet'

[Deleted User]

Yes because there is no incentive for them to run high risk operations.

harryhound

Yes BUT, though they don't have the problem of always having to beat last year's figures or risk getting taken over by someone who has, like any organisation without effective owners, the (senior) management can allow the business to get flabby and start running the operation for their own benefit.
(I remember Nationwide having trouble with its depositors over the way the self perpetuating board was running the organisation - terrific verbal punch up at the methodist hall near the House of Commons - some of the points made were taken on board in the next 12 months).

Equitable Life & London Life were both old and venerable mutual organisations.
Perhaps the greatest risk is when they de-mutualise and think they are now the cleverest shark in the pool.

Rafter

Building societies are generally as 'safe as houses' as most of their deposits are lent out to fund UK mortgages.

If you are particularly bearish about UK property and don't trust your neighbours to keep paying their mortgages then they might not be the place for you.

Banks on the other hand lend for mortgages, personal loans, overdrafts and company loans so in theory they are less risky if one sector goes sour. However, they also tend to borrow more money from pension funds, investment funds and other banks to fund their operations so are more at risk if this money dries up - as happened with the Northern Rock.

If you are really worried about your money being save, split it so that no more than £35k is in each bank or building society.

You could also think about National Savings if you think that the government is less likely to lose you money.

If you are worried about the UK you could think about opening a Euro or other account. You could also invest in gold which generally does well when investors are worried about paper money.

What some investors seem to forget though is that the reason you earn interest on savings is because the money is lend to others. Generally the more interest, the greater the risk.

You have to also remember that Banks invest your money for long periods (up to 25 years in the event of a mortgage) but often allow you to withdraw your money at short notice. That is fine as long as other people are depositing.

However, as in the case of Northern Rock, everyone is trying to get their money out at the same time, and legally Northern Rock cannot ask it's mortgage customers to pay back their mortgages straight away.

So, the FSA and others don't think there is a problem with Northern Rocks Mortgages. They have very low levels of mortgage arrears so the money will be repaid - just not over the space of a week!

R.

Rafter

Oh, and one final point.

Because a building society is owned by its own depositors and mortgage holders, it is run in their interests rather than those of shareholders and employees.

So, as long as the Directors are doing their job, they shouldn't take any risk with your money just to make a few extra £ in profit or to earn themselves extra bonus.

R.

Agri47

Are Building Societies safer than banks, and if so, why?

The credit rating agencies appear to think not:

http://www.fitchratings.com./corporate/sectors/issuers_list_corp.cfm?sector_flag=3&marketsector=1&detail=&body_content=issr_list

(Search for a particular banks or building societys using the Find Banks Issuer search box and then compare)

dwsjarcmcd

Agri47 wrote: »

The credit rating agencies appear to think not:

http://www.fitchratings.com./corporate/sectors/issuers_list_corp.cfm?sector_flag=3&marketsector=1&detail=&body_content=issr_list

(Search for a particular banks or building societys using the Find Banks Issuer search box and then compare)

Good point, other than Fitch rate Northern Rock as 'stable'!!

Agri47

dwsjarcmcd wrote: »

Good point, other than Fitch rate Northern Rock as 'stable'!!

This no doubt reflects the fact that the Government has now underwritten the deposits with public money (note the support rating floor in particular).

baby_boomer

Are building societies safer than banks?

MSE thread link - Our MPs have foolishly just removed the most important safeguard and allowed societies to borrow more in the wholesale markets - just like Northern Rock