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How safe are building society savings in the event of a House Price Crash
Response from the Bank of England
An excellent question which was submitted by one of our visitors. We didn't feel that we were qualified to answer this question so we put it to the Bank of England and this was their response:
"The first point I should make is that your building society savings are protected by the Financial Services Compensation Scheme (FSCS) which exists to protect depositors' funds if a financial institution (such as a building society) were to collapse. More details about this scheme, including limitations, can be found at http://www.fscs.org.uk.
However, it is extremely unlikely that an established building society would collapse or become insolvent as a result of a "severe correction" in the housing market. House prices fall when demand slackens. This could be caused by a number of factors including higher interest rates which might mean some people are unable to afford their mortgage repayments. If this were the case there could be a higher than normal number of repossessions. For the majority of homeowners a fall in house prices is not relevant unless they are in the process of selling or buying. In theory, if there were an enormous number of repossessions (with vast parts of the community becoming homeless) a lender might possibly not have enough liquid assets to meet demand (assuming all depositors tried to withdraw their funds at the same time). But there are a number of factors which are likely to prevent this from happening.
First, there are lending restrictions imposed upon financial institutions by the Financial Services Authority which help to ensure that they do not place themselves in a situation whereby they cannot meet demand from their depositors. The risks are carefully assessed and the rules applied stringently. Further details of these can be found on the FSA website at http://www.fsa.gov.uk
The possibility of this type of major financial risk to the economy is carefully monitored by a range of institutions including the Bank of England. Further details of our financial stability role can be found at http://www.bankofengland.co.uk/financialstability.
Finally, there are procedures in place whereby the Bank can act as 'lender of last resort' to an institution if the failure of that individual institution would have repercussions (or cause the collapse) of other institutions. Please see http://www.bankofengland.co.uk/corepurposes for more detail.
As you can see, there are many safeguards (both direct and indirect) in place which should help to protect your funds. If you recall there was a period in the late eighties and early nineties when there were a large number of repossessions as a result of higher interest rates, and a consequent fall in house prices as demand slackened. However, no problems arose for depositors as far as the safety of their funds was concerned. And as you may be aware, interest rates are currently considerably lower than they were during that period. I hope this has provided some reassurance about the safety of your building society savings."
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