Councils review deposits in downgraded building societies

by Gill Montia

Story link: Councils review deposits in downgraded building societies

Storm clouds could be gathering for some UK building societies with the Sunday Telegraph reporting that local authorities are preparing to withdraw deposits from mutuals that have recently had their credit ratings downgraded.

The newspaper names Westminster, Haringey, Dorset and Barnet councils as having confirmed that they will withdraw funds as soon as fixed-terms have expired.

Last month, nine UK building societies had their credit ratings cut by Moody’s which based its reassessment on a peak-to-trough fall in UK house prices of up to 40%.

The societies concerned reacted angrily, accusing Moody’s of taking a pessimistic view.

Meanwhile, local authorities have already been spooked by the potential losses racked up by councils that invested in failed Icelandic banks.

The Audit Commission recently singled out those that continued to invest in Iceland despite warnings from credit rating agency, Fitch, that the banks were in difficulties.

To add to the unease, the building societies downgraded by Moody’s may have endangered their participation in the Treasury’s Special Liquidity Scheme, which allows UK mortgage lenders to swap difficult to trade assets, such as mortgage-backed securities, for Treasury bills.

The securities swapped are credit rated and Moody’s downgrades therefore demand a re-examination of the assets lodged by the building societies concerned.