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Prudent Cumbrian building societies penalised by Government bank bailout rules

February 3, 2009 10:25 AM

South Lakes MP Tim Farron has backed local building societies who are being forced to pay a disproportionate price to bailout reckless banks.

The Government's bailout of banks last year all involved a loan from the Bank of England to the Financial Services Compensation Scheme (FSCS), on which banks and building societies are required to pay interest.

As this levy is based on the level of savings that a financial institution holds, those building societies which have been prudent and raised funds for lending from their savings business are paying around 15% of their pre-tax profits to the FSCS. However, reckless banks which have raised money on the wholesale markets, and as a result caused the financial crisis, are only paying around 5% of their pre-tax profits to the FSCS.

This means that building societies like the Furness and Cumberland - who sensibly ensured that their savings massively outweighed their lending - are being forced to pay the price for the profligacy and greed of bankers in the city of London.

Mr Farron has supported a motion in Parliament which calls for a more equitable scheme for funding the insurance of deposits of failed banks.

Mr Farron said: "The bailout scheme was essential to stop a run on the banks. In fact, my colleague Vince Cable called for this months before the government finally did it. However, it is not right that those banks and building societies who have behaved in a moral and prudent way, should be clobbered in order to bail out those who caused the financial crisis."

The text of EDM 426 reads:

That this House notes the disproportionate impact on building societies of the Financial Services Compensation Scheme (FSCS) levy, resulting from the failure of Bradford and Bingley plc, the Icelandic banks and London Scottish Bank; recognises that building societies' share of the levy, approximately £200 million per annum in each of the next three years, is equivalent to about 15 per cent. of the sector's pre-tax profit for 2007-08 financial year ends; notes that building societies' share of the levy for years beyond 2011 is uncertain, but could well be higher than £200 million per annum; acknowledges that the impact on building societies contrasts starkly with the banking sector, where the FSCS levy is typically well below five per cent. of pre-tax profits over a similar accounting period; further notes that the current allocation of the FSCS levy works to the detriment of building societies' members, their savers and borrowers; acknowledges that no building society has ever made a call on the FSCS or its predecessor schemes; and calls on the Government to introduce a more equitable scheme for funding the insurance of deposits of failed banks.