LONDON BRIEFING:Banking system may be returning to normality as supermarkets slug it out for market share

AS ONE rescued bank heads for privatisation, so another goes under. Just hours after chancellor George Osborne last week unveiled plans to return Northern Rock to the private sector, regulators were moving in on another troubled bank, the Southsea Mortgage Investment Company.

The tiny Hampshire-based lender was put into liquidation after loans it made on property developments at the peak of the market went sour. With just one branch in Havant, on the south coast of England, Southsea is minuscule in comparison with Northern Rock, with assets of just £10 million, retail deposits of just over £7 million and only 270 depositors.

Its sudden demise nonetheless represents a watershed moment for the British banking sector, marking the first time since the financial crisis struck that the government has refused to provide blanket protection for depositors.

When the Scottish-based Dunfermline Building Society failed in the spring of 2009, the Bank of England swept in with an emergency bailout. Northern Rock, of course, was rescued by the taxpayer in 2008 after suffering the first run on a bank since Victorian times.

At Southsea, depositors will be covered by the government’s Financial Services Compensation Scheme, which offers full protection for savings of up to £85,000, but there will be no compensation above that level. While most of the tiny bank’s depositors were prudent enough to keep their nest eggs below the £85,000 threshold, some 14 of them went beyond that limit, including one who apparently had almost £180,000 on deposit, and thus stands to lose more than £90,000.

In the grand scheme of the great banking collapse, the figures are minuscule. But, for the individuals involved, the loss of funds on that scale is a personal disaster. The government is sending a clear message that there can be no blanket bailouts in the future and that the banking sector has returned to some sort of normality.

That’s the message, too, from the impending privatisation of Northern Rock. Announcing the move at the Mansion House dinner in the City of London last week, Osborne hailed it as the first step towards getting the British taxpayer out of the business of owning banks.

“Images of the queues outside Northern Rock branches were a symbol of all that went wrong, and its chaotic collapse did great damage to Britain’s international reputation,” Osborne told his audience of bankers. “Its return now to the private sector would help to rebuild that reputation.”

The sale, which is also aimed at improving competition in the retail banking sector, is expected to raise a relatively modest £1 billion – some way short of the £1.4 billion of taxpayers funds that have been injected into Northern Rock. Already there is talk of a bidding war, with potential buyers including Blackstone, the controversial US private equity giant, Richard Branson’s Virgin Money, Tesco Bank, National Australia Bank and the Coventry and Yorkshire building societies.

There has been some disappointment that the return of the Newcastle-based lender to the private sector is to be via a sale rather than a remutualisation of the business. Industry observers point out that while not a single one of the building societies that demutualised in a flurry in the 1980s survives today, those who resisted the lure of the stock market have remained resilient in the face of the financial crisis.

*****

The reason for the abrupt departure of the heir-apparent at Asda became a little clearer yesterday as the latest industry data showed a slide in market share at Britain’s second-largest supermarkets chain.

As the discounters grabbed a growing slice of the weekly shop, data from Kantar Worldpanel showed Asda’s share of the market had fallen from 16.7 per cent to 16.3 per cent. No wonder, perhaps, that things “didn’t work out” for chief operating officer Simon King, number two to chief executive Andy Clarke, as he quit the group unexpectedly on Monday after just six months in the role.

King, a former Tesco executive, joined Asda with excellent credentials but the Walmart-owned group is now scrabbling around to find a replacement. In the meantime, the market share data underlines Asda’s difficulties as it comes under increasing attack from discounters such as Aldi and Lidl.

The discounters’ share of the market, although still small, has rocketed by 18 per cent year-on-year. In second place, with growth of almost 9 per cent, is the upmarket Waitrose chain, further evidence of what Kantar’s Edward Garner calls the “two nations” trend, a trend that at the same time has seen Tesco’s “Finest” range produce growth in double-digits. Asda, unfortunately, finds itself right in the middle, which looks an increasingly uncomfortable place to be.

Fiona Walsh writes for the Guardianin London