Icelandic crisis prompts mutual merger

22 October 2008

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.”

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