Tuesday, February 23, 2010

Building Societies

Yesterday I mentioned a dying breed, Building Societies. Naturally that's a slightly pessimistic take, and in fact many of the Building Societies I thought were long gone still exist, including the Leeds Building Society.

Nonetheless, Moody's, which is a credit rating agency, has raised concerns about the building society sector. Credit rating agencies make pronouncements on the credit-worthiness of various types of institutions, ranging from banks and building societies to sovereign governments. They have recently, for example, been raising big questions about Greece's credit-worthiness. These agencies give ratings to institutions, and types of assets - hence in the Sub Prime Primer the talk of triple A (AAA) rated assets.

Anyhow, Moody's has suggested that Building Societies may be unable to raise the necessary liquidity to match its obligations to customers without government help, talking of a £300bn gap.

You can now start to understand much of what is discussed in this article from yesterday's lecture: Retail banking funds are talked about, as consumers apparently have moved away from smaller building societies to the percieved safety of government-owned banks, while wholesale funds are mentioned, as banks and other intermediaries still seem reluctant to deal with each other, it seems. Recall that banks and building societies will often deal with each other, and make loans to each other, to ensure that all banks and building societies have the funds they need for day-to-day transactions.

This article seems to suggest that consolidation is around the corner: That means that mergers and take-overs are very likely. If a building society thinks it will be unable to meet its demands from customers, then the best thing will be to be taken over by a bigger bank that has the ability to meet the liquidity requirements customers make - or be bailed out/nationalised like Northern Rock.

So I imagine we should expect Santander to buy a load more building societies in the next year or two...

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