Bradford & Bingley deal: what does it mean for you?
The credit crunch and resultant banking crisis has claimed many victims, but the news that Bradford & Bingley, the building society turned bank with a 151-year history, has finally succumbed will cause worry, panic and even anger among many customers, shareholders and members of the general public.
Unlike Northern Rock, which was subject to debate and argument for several months before it was eventually brought under public ownership, Bradford & Bingley’s nationalisation is immediate thanks to new banking laws only introduced earlier this year.
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Although finding the bank new owners has ultimately failed, the government has managed to broker the sale of its saving and branch businesses to Santander, the Spanish owner of Abbey and soon-to-be parent of Alliance & Leicester.
The rest of its operations, including its mortgage business, will be taken into public ownership. Meanwhile, share trading has been suspended.
So, whether you are a saver, borrower, shareholder, taxpayer or simply a concerned member of the public, what does it mean for you?
According to Bradford & Bingley, it is “business as usual”. If you are customers of the bank then that might be a little hard to swallow. After all, it's a shock finding out your bank has been taken into public ownership by the government and its retail business (including current accounts and savings accounts) have been taken over by a Spanish bank that also happens to own its rival Abbey.
The good news is that your money is safe. As part of the government stepping in and nationalising Bradford & Bingley to stop it from failing, it has “come good” and honoured around £4 billion of your money.
This is the amount held in Bradford & Bingley but not covered by the Financial Services Compensation Scheme (FSCS), because it was in accounts that exceeded the £35,000 limit. This is a significant move by the government, and suggests its commitment to ensuring no saver in the UK loses money as a result of a bank failing.
The remaining £14 billion that was covered by the FSCS has now been paid out to Santander (thanks to a loan from the Bank of England) and transferred to its balance sheet.
Of course, in return for stumping up the cash, the Treasury and the FSCS have acquired the right to any proceeds from the wind-down of the bank, including the sale of any assets of the remaining business.
So, the advice from the Treasury is that savers should be reassured that their money is safe, and should continue to use their normal branches to access their accounts.
In order to help customers, Bradford & Bingley will open all its branches this morning as usual, and internet, call centre, and all other transaction services will operate as normal.
The deal is, of course, a boon for Santander. The transfer of Bradford & Bingley's £20 billion savings business to its balance sheet will only make it a stronger player than it already is.
Mortgage and personal loan borrowers
The break-up of Bradford & Bingley will see its mortgage book and personal loan book taken into public ownership.
The most important thing for you, as a Bradford & Bingley borrower, is to keep on meeting your payments in full and on time. In the short-term, the new arrangements are unlikely to have too big an impact on you.
However, it is worth bearing in mind the likely long-term affect of the nationalisation of Bradford & Bingley. Northern Rock - the firm’s precursor in being the first bank to be taken into public ownership at the start of this year - has been forced to significantly trim its mortgage book and, as a result, has stopped offering existing customers competitive new rates once their current deals expire.
As part of its bid to shrink its mortgage book, Northern Rock also signed a deal with Lloyds TSB to recommend borrowers shift their business over to the rival bank.
Bradford & Bingley borrowers, while safe for now, should not expect to see their current deals matched when it comes time to remortgage, and are likely to have to look elsewhere for a new lender or start paying their loan’s standard variable rate.
If you had shares in Bradford & Bingley then your loyalty is commendable; the bank has suffered a terrible year with its share price down 90% over the past 12 months.
The news that the bank’s assets are being taken into public ownership means that its listing of shares has been cancelled and trading suspended.
So, while on Friday 26 September your shares were worth 20p each, they are now effectively worth nothing.
There are around 930,000 private shareholders in Bradford & Bingley, and the chances are they will left out of pocket as a result of the deal. Again looking at the example of Northern Rock, there may well be plans to compensate shareholders down the line but this could take months, if not years, to be finalised.
Northern Rock shareholders are currently being considered for compensation by the government, but this is still in the very early stages.
The UK Shareholders Association (UKSA) has already declared its opposition to the nationalisation, arguing that there might be a better alternative to protecting the interests of all stakeholders, including shareholders.
Roger Lawson, communications director of the UKSA, says: “This seems to be another case, like Northern Rock, where the rights of shareholders to have a say in what happens to the company they own is being overridden by the government.
“Whereas more than 100,000 Northern Rock shareholders were effectively ignored by the government, we now have a million shareholders in Bradford & Bingley being treated in the same manner.”
It’s hard to argue against rescuing banks; as much as it might pain some people to admit, letting a British bank fail would be devastating for the economy and the banking sector as a whole.
Still, the fact that the deal will cost an estimated £621 million is a bitter pill to swallow. And concerns may be coming thick and fast about how much liability taxpayers will have to shoulder as a result of the deal.
The government has made moves to reassure taxpayers that they will not lose out as a result. Chancellor Alistair Darling told BBC Radio Four that the FSCS’ role in the nationalisation meant taxpayers were protected from any losses.
Therefore, if the assets taken into public ownership do not provide enough capital to meet its debts, then the losses will be eventually paid by the banking sector not the general public.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
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.