Which is safer, a bank or building society?

"How do banks and building societies size up against each other?" asks the Motley Fool's Szu Ping Chan. And which is the safer bet for your cash?

It all used to be so simple. Before 1986's 'Big Bang' regulations, building societies were all 'mutuals', owned by their members who were mostly savings account holders and mortgagees. They accepted savings deposits and made home loans. Banks, on the other hand, offered current accounts and personal loans, but no mortgages. As companies they could issue shares, list them on exchanges and pay dividends. That neat division ended in the mid-1980s. Suddenly, banks could offer mortgages, while building societies could offer current accounts. Further, several building societies, such as Abbey National, converted to companies and listed shares on the London Stock Exchange. Others, such as the Nationwide, remained as mutuals.

So with the lines blurred, what's the best option for a nervous saver? Safest are the banks that are majority owned by the Government Northern Rock (100%) and now Royal Bank of Scotland (nearly 60%). In close third is LloydsTSB/HBOS, in which the Government has a near 50% stake. In theory, building societies are safer than banks because they can only raise limited capital from the now frozen wholesale markets. But plenty still took that option the average proportion of funds raised that way is 30%, says the Buildings Society Association. And some smaller building societies are merging to stay alive.

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At the banks, the full scale of mortgage-related write-downs remains uncertain. So our advice is to limit deposits with a single Financial Services Authority-registered institution to the FSCS compensation cap of £50,000. The Financial Services Authority recently made things easier for account holders at building societies that merge: you keep £50,000 of cover for each one until September 2009.