Chelsea Building Society becomes the latest victim of the Icelandic banking failure

Article source: Andrew Ellson -

Chelsea Building Society becomes the latest victim of the Icelandic banking failure

The collapse of the Icelandic banking system has continued to affect more institutions with the Chelsea Building Society being its latest victim. The Cheltenham based mutual has a £55 million pound exposure to the two Icelandic banks that collapsed last week; they were Kaupthing and Landsbanki.

The Chelsea BS, which has a number of savings accounts paying varying interest rates up to a high of 6.6 percent, emphasised that their clients’ deposits will not be affected in any way.

The spokesperson for the Chelsea said: "Chelsea's position is strong, and despite the potential for loss we continue to have more than sufficient capital and cash resources to operate our business as normal."

The British government has already confirmed that it will give back private savers’ deposits who had their money with Icesave, an Internet Savings arm of Landsbanki, and Kaupthing Edge, the British subsidiary of Kaupthing. It has however declined to offer any guarantee on the funds for institutional investors and corporate savings accounts. After the banks collapsed, approximately 70 councils all over England and Wales admitted to having a combined exposure to the Icelandic banks of circa £643 million.

The potential losses incurred by the Chelsea Building Society after the collapse of the Icelandic Banks have so far been the biggest announced. But the Chelsea Building Society which boasts 600,000 clients stands by its original decision to invest in Iceland. Chelsea’s spokesperson explained how the Chelsea could justify the risk of investing in Iceland. She stated that the Chelsea manages a diverse liquid assets portfolio within strict exposure boundaries.

The risk model, set by their board of directors requires that investments be spread across a wide range of highly recognised organisations with a minimum of an ‘A’ credit rating at the point of first investment. This risk model is what helps to spread and reduce the risks.

The ₤55 million exposure is equal to 1.55 percent of the society’s ₤3.5 billion of liquid assets that are held in an easily accessible form such as accounts that earn interest. The total assets of the building society including its 24 hour branch network add up to more than ₤13 billion.

The society holds ₤9.02 billion of customer deposits. This covers 88 percent of its loans. It denied that it would have no other option than to reduce savings rates as a result of this exposure. However the customers of Chelsea will be angry at the society’s experts who were not keen enough to warn them of the impending risk.

Mr Richard Hornbrook, the Chief Executive of the mutual, was paid a staggering basic of £260,000 in 2007, plus total benefits including bonuses and increases accrued pension of nearly half a million pounds. Peter Walsh the chief financial accountant took a basic salary of £214,000 and his total benefits package amount to a shade under three hundred and fifty thousand pounds.

This year has seen several financial institution encounter problems and Chelsea is no exception. The past month saw Derbyshire and Cheshire being taken over by Nationwide the largest organisation in the U.K at the bequest of the Financial Services Authority.

Derbyshire’s problems came up as a result of a failed IT project, they also engaged in risky lending. Cheshire on the other hand embarked on unsuccessful and disastrous commercial lending. Both of these societies, Cheshire and Derbyshire realised heavy losses in 2008.