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Seven UK building societies in talks with the Bank of England

The Bank of England has this weekend confirmed talks with seven UK building societies amid concerns of possible knock-on effects from last week's Moody's debt rating downgrade. The seven rumoured to be in talks are Chelsea, Yorkshire, Skipton, Coventry, Norwich and Peterborough, Newcastle and Principality. While there is no suggestion that any of the above building societies are in any kind of financial trouble, with confirmation that they have all passed the FSA stress test, their participation in the bank's special liquidity scheme may be at risk.

This was a scheme introduced at the height of the credit crunch whereby financial companies were able to "swap" bonds and potentially toxic assets for increased liquidity. The rating of the bonds in question was highly influential in the amount of money they were able to lend and their ongoing participation in the scheme. After last week's across-the-board Moody's downgrade, a number of the bonds which are used as assets against increased liquidity have now seen their credit ratings fall.

This is a very difficult situation for the FSA, the Bank of England and the UK government to handle because if customers receive any indication of problems with these building societies then savings are likely to be withdrawn. This would have a significant knock-on effect to liquidity and financing arrangements for a number of building societies which could cause significant problems in the future.

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