Icelandic crisis prompts mutual merger
The collapse of Icelandic banks has taken its first direct hit on the building society sector, with Barnsley BS forced to go cap-in-hand to the Yorkshire amid fears it may have to write-off £10 million.
The Barnsley, the UK’s 34th largest society with 60,000 members, had up to £10 million invested in two Icelandic banks (Kaupthing Singer & Friedlander and Heritable Bank, owned by Landsbanki) that it is now expecting to have to write-off. As a result, it has approached the Yorkshire BS, the UK’s third largest society after Nationwide and Britannia, and the two have agreed to a merger.
It is not the only society to have potentially lost money as a result of trouble in Iceland; Chelsea BS recently revealed it had £55 million with Icelandic banks.
The credit crunch has already forced the building society sector to contract; so far this year, Chelsea BS has merged with the Catholic, Nationwide has taken the Derbyshire and Cheshire under its wing, and Britannia has revealed it is looking at merging with the Co-Operative.
In 2007, Nationwide – the UK’s largest society – merged with Portman, the second largest, creating a super-mutual.
If the merger between Yorkshire and Barnsley goes ahead, the combined society will boast 1.96 million members and assets of £20.3 billion.
Impact on customers
Traditionally, building society mergers are voted on by members, with financial bonuses paid to members of the brand that is to be absorbed.
However, the merger between Yorkshire and Barnsley is expected to complete on 31 December this year with no member vote required, and existing member will not receive any financial bonus as a result.
Yorkshire has revealed its intention to pursue the £10 million invested in the two Icelandic banks, and if this is recovered Barney’s members may receive a cut.
Although the combined society will be called the Yorkshire Building Society, Barnsley’s local identity and name will be retained across all its eight branches.
Barnsley borrowers who currently make payments based on its standard variable rate (SVR) will, however, be transferred to Yorkshire’s SVR. Currently this represents a good deal – Barnely’s SVR is 7.19% while Yorkshire’s is 6.9%, but there is no guarantee that this won’t change before the merger goes ahead.
The accounts of Barnsley savings members will also move to the Yorkshire but will remain under the Barnsley brand. The larger society has promised savers will remain on similar, or even better, terms and interest rates than provided by the Barnsley prior to the merger.
Steve Mitchell, acting chief executive of Barnsley, says: “The current exceptional situation in Iceland and the full extent of the repercussions were beyond anticipation. The society’s reserves are sufficient to absorb our potential losses to Icelandic banks, but the board considered that their reduced level would restrict its ability to provide members with the security and benefits associated with mutuality.”
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.