We live in extraordinary times.

One minute building societies are touted as offering some of the most competitive rates
for both borrowing and lending, and then yesterday, the chief executive
of the Abbey, Antonio Horsa-Osorio, told the Prime Minister at a power breakfast
of senior bankers in Downing Street, that the current mortgage crisis threatened the
survival of many small building societies.

The chief executives of some of the UK’s biggest banks said at the same meeting
that they would take 100 per cent of the mortage market, squeezing some of the smaller building societies out of the lending business altogether.
How can this be, I ask myself? Neil Johnson, PR and policy manager at the Building Societies
Association, said he was bemused by the bankers’ comments. Building societies are largely funded by their retail customers’ deposits and have experienced strong savings inflows in the last few months.

Small building societies rely on the wholesale markets for only 9 per cent of their
mortgage funding, a lower percentage than for larger building societies, and even less than the
high street banks.

So what is going on? Ray Boulger, senior consultant at mortgage brokers John Charcol
thinks that the answer lies in today’s fierce competition for retail deposits where the banks
can afford to offer dizzy rates of interest on savings accounts, thereby potentially threatening the savings inflows to the building societies.

There does seem to be some evidence of this already. Of Defaqto’s top 10 online savings accounts today, there is only one building society - the Coventry - albeit with three different top paying accounts.

The others are all banks - Abbey, Alliance & Leicester, Kaupthing, ICICI, Bradford & Bingley and Citi. All top 10 players are paying in excess of 6 per cent, or more than one per cent above  Bank of England base rate of 5 per cent.

The building society movement has shrunk rapidly over the last decade, following the
the slew of demutalisations in the 1990s and mergers  in recent years, with only 59 left today, out of 2,286 in 1900.

By and large, building societies have had a long and venerable history of borrowing and lending in the UK, with many of the smaller societies valued by their customers for their personal and local service.

It would be a shame if smaller building societies were now to become a new, and most unlikely,
victim of the credit crunch.