Failed banks may cause mortgage rise

The compensation paid to people saving with failed banks could force the majority of building societies to increase their mortgage rates, according to research.

Six out of ten building societies said that the levy paid to the Financial Services Compensation Scheme (FSCS) to compensate savers with banks such as Bradford and Bingley, Icesave, Friedlander and Kaupthing Singer would require them to raise mortgage rates to cover the cost.

Over half of building society chief executives said that their savings rates may have to fall.

Building societies are unhappy with the levy placed upon them by the FSCS. The required contribution is not based upon the risk of the institution collapsing, but on the amount of consumer funds held. Skipton Building Society said a major factor in its 86% dive in profits, announced earlier this year, was the amount it had to pay the FSCS.

Saving levels are expected to drop by 9% in 2009, but much of that is expected to be recovered in an 8% rise predicted for 2010, while it is thought that net mortgage lending will decrease by 22% this year, only to recover by 8% next year, according to the Building Societies Association's (BSA) research.

Building societies, meeting at the BSA's annual conference, were concerned about the high competition they face from partly nationalised or nationalised banks. The current low interest rate was also a cause for concern, as it became difficult for building societies to make good profit, while meeting the requirements of both their borrowers and their savers.

"The last 12 months have certainly been tumultuous, but it's encouraging to see that the majority of building societies have a positive outlook," said Adrian Coles, director general of the BSA. "Despite challenges faced by building societies, their chief executives feel they are in a strong position to overcome them.

"The next year is not seen as a period of growth, but a time when balance sheets can be strengthened, and the business primed to take advantage when market conditions become more favourable."

About Us