It's back to the future as savers become the chosen ones

Last year, when the credit crunch had barely picked up speed, Chancellor Alistair Darling, said we needed a return to "old fashioned" banking. The response was a mixture of derision and laughter from the City.

Now, after a week in which the Government in effect offered to take a stake in seven of the UK's biggest banks and the Nationwide building society, no one is laughing. It seems inevitable that as far as the banking sector is concerned, it will be a case of back to the future.

"The banks had built huge, puffed-up businesses based on wholesale money markets. They had been warned by the Governor of the Bank of England [Mervyn King] that they needed more capital [money on deposit] to protect themselves," says Matthew Bullock, chief executive of the Norwich and Peterborough building society. "And finally the banks have had to face up to this."

Mr Bullock continues: "As businesses, they are not going to be able to grow as they have. First they will have new chief executives and then they will have to operate under the old principle of first attracting money from savers so they can lend to borrowers."

So what will this new landscape look like for bank customers, savers and borrowers? Is it really going to be a case of rolling back the years?

Up until the credit crunch made savers fashionable again, the banks had consistently underpaid their depositors while at the same time offering mortgage borrowers low headline interest rates.

But as the credit crunch seeped its poison into the world financial system and banks stopped lending to each other, the number of available mortgages shrank by around two-thirds, disappearing altogether for higher-risk individuals – such as the self-employed or those with poor credit histories – and in practice for first-time buyers too.

More generally, rates rose across the board for new borrowers and those looking to remortgage.

Despite the government bailout and the 0.5 per cent cut in the base rate, it seems would-be borrowers are going to have to continue to live with tougher lending criteria and higher rates.

"As far as the lenders are concerned, loan to value [the size of the mortgage relative to the price of the property] is king and will remain so for the foreseeable future," says Ray Boulger of broker Charcol. "People who have a low loan to value – say under 75 per cent – will continue to get the better rates while the rest will pay more, or in the case of sub-prime they will have to miss out."

In the short term, Mr Boulger says that the Government's bailout of the banks will, at best, only "stop mortgage availability getting any worse". Looking longer term, he reckons that only once the correction in the housing market has played itself out – possibly 18 months from now – will the situation ease, and even then it's unlikely there will be a return to the tasty rates on offer last year.

One of the few bright spots of the credit crunch has been savings rates. Banks have been scrabbling to fill the holes in their balance sheets and so they have been paying above-normal rates – sometimes close to two percentage points above the base rate – to attract new deposits.

But if the government bailout works, these good days may be over for savers, though at least they can feel reassured that the institution holding their money is in better shape than it once was.

"The banks can fill their balance sheets with the money from the Government, so they won't need to go after savers so aggressively. How-ever, in the long run they now recognise that savers are important and it's easiest and safest to raise their capital from depositors," explains Mr Bullock.

Savings rates may edge a little lower if the bailout works its magic, but the change in attitude of the banks could also mean the rebirth of the branch. "Some banks have considered these an encumbrance for years," adds Mr Bullock.

"But the message for customers is that you and your business are about to get important again."

Interesting? Click here to explore further