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UK savings market is a 'postcode lottery'

Thu, 23 Jul 2009

Savers face a 'postcode lottery' with varying rates of interest paid on their money depending on where they live in the UK, according to research by the University of East Anglia.

The study, published in the July issue of the journal Applied Economics Letters, found that banks and building societies based in different regions provided significantly different levels of interest on deposits between 1992 and 2006. Using data from independent financial information provider Moneyfacts, the research considers 1225 deposit accounts, both instant access and notice, issued by 167 providers based regionally and nationally, as well as those that operate remotely using the telephone and Internet.

Banks and building societies based mainly in Northern Ireland, Yorkshire and the east and north of England provided significantly lower deposit interest rates, while higher interest rates are provided by those in the north east and south west of England and the Midlands. Nationally and remotely distributed banks and building societies also offered above-average rates of interest.

Study author Dr John Ashton, of the Economic and Social Research Council (ESRC) Centre for Competition Policy at UEA, said that despite the current economic situation the savings market remained a stable one. "There has been a lot of volatility over the last year but we wouldn't expect the savings market to have changed significantly, bearing in mind it was consistent over a long period of time before that," said Dr Ashton.

"The findings indicate that geography is only one of many factors which influence interest rate setting by banks. Banks which operate regionally and nationally adopt different business models and behave distinctly in the deposit market. Savers should regularly check interest rates and maybe consider remote access accounts if they are looking for higher rates.

"Regionally-based building societies and banks have been far more reliant on deposits to fund other aspects of their banking business, such as loan provision, than nationally-based banks, which have had greater access to money market funds until recently. Also, while larger national banks compete with each other they are less likely to compete directly with smaller regional banks and building societies."

The study is part of an on-going research programme into issues of interest rate setting and competition undertaken by Dr Ashton. The regional differences were identified by considering bank and building society branch networks. While no one bank has a complete national branch coverage of the UK and Northern Ireland, many banks or building societies have branches in a number of regions, while others operate only in one or two regions. A bank or building society is defined as regionally-based if 75% of their branches are located in one region. A nationally-based bank is defined as having more than 50% of their branches in three or more regions. Banks which only undertake remote distribution using the telephone, internet or postal system are considered separately.