Building societies still make sense

It's been a mixed week for building societies; credit ratings for several societies have been cut, but the mutuals are still an attractive option for many savers.

Building society bosses will have been fed up this week when they discovered that ratings agency, Moody's, was downgrading the credit rating of nine building societies. The societies include Nationwide, Chelsea, Britannia and Yorkshire.

The cuts mean that Moody's now thinks that the building societies are more likely to go bust than it had previously thought. Moody's performed a 'stress test' on the societies in which UK house prices fell 40% from their peak. If that scenario came true, Moody's believes that several societies would struggle.

So should building society customers worry?

No.

Although I think house prices have further to fall, the peak-to-trough fall may not be as large as 40%. And even if we do see a 40% fall, Moody's hasn't downgraded the building societies to 'junk bond' status. The mutuals are still 'investment grade.' In other words, Moody's thinks the likelihood of default has increased significantly, but it doesn't think the chances of default are high.

There's also a credibility issue here. It's now obvious that the rating agencies were far too relaxed about banks' riskier activities during the boom.  In fact, I suspect the agencies didn't really understand what the banks were doing back then. No doubt Moody's is now determined to restore its reputation for prudence and may be too pessimistic as a result.

What's more, all UK building societies are protected by the Financial Services Compensation Scheme. So if a building society went bust, you'd still receive compensation for your lost savings up to a value of £50,000.

In fact, even if you had more than £50,000 in a savings account, you'd probably still be fine. After all, the government fully compensated all savers with UK accounts when Northern Rock, Kaupthing and others went to the wall. The government also took control of those banks' mortgage books, so mortgage borrowers didn't suffer either.

And when some building societies have hit financial difficulties over the last year, the government has facilitated rescues by rival mutuals.

Good news

So that's the bad news out of the way. We've also seen some good news for building societies this week. lovemoney.com partner, Moneyfacts, published some data on the consistency of savings accounts and the majority of the top performers were building societies.

For many of us, consistency is a crucial factor when it comes to picking a savings account. If you're the type of person who is happy to scan the best buy tables every six months and move your money to the top account, then you don't need to worry about consistency.

But if you don't have the time or the inclination to do that, then it makes sense to go for an account that has consistently paid out a decent rate in recent times.

Here are some figures:

Most consistent no-notice internet savings accounts over the last 18 months (without bonus)

Based on interest earned on £1000 in 18 months to 6 April 2009

Most consistent no-notice internet savings accounts over the last 36 month

Based on interest earned on £1000 in 36 months to 6 April 2009

Although the top account in each table is not from a building society, overall the mutuals are well placed on the leader boards.

And if you move away from the online world, the building societies are even more dominant. The most consistent no-notice savings account (without bonus) over the last 18 months has been Beverly Building Society's Postal Account. When it comes to notice accounts Chesham Building Society is No.1 over the same period.

So, in my view, building societies have a lot going for them. If you like the look of a particular financial product from a building society, then take it. If a rival product from a bank better suits your needs, then go for that instead. It's a question of horses for courses.

The crucial point though is on risk. Yes, a small regional building society may be at greater risk of defaulting than HSBC. But the government will always find a way to rescue a small mutual, so, in reality, I don't think your money is at any greater risk.

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