West Bromwich survives

Unlike its local football team, the West Bromwich Building Society appears to have engineered a last-minute survival, following rumours yesterday that it was on the brink of collapse and in need of Government rescue.  Although things came to a head yesterday, the society was under similar scrutiny about a month ago as concerns grew over the losses it had incurred – mainly through its foray into commercial and buy to let lending.

The news today is that the society, which employs 850 people and has 46 branches, will escape a complete breakup by swapping its debt for a new form of equity (with the suitably confusing title of ‘profit participating deferred shares’).  For a mutual society, owned by its members, not shareholders, this debt swap is a controversial move.

Building Societies have had a rough time of it recently.  The fallout from the credit crunch left many of them badly exposed to losses on their lending business – particularly in areas like buy-to-let and sub-prime mortgages (and commercial lending in West Brom’s case).

Then in April this year, several societies had their credit ratings downgraded following stress tests – a bad case of getting kicked when you’re down.  The result of all this has been a major shake-up of the mutual sector – here’s a list of the societies that have merged or been rescued in the last 12 months:

SocietyNow part of…
Barnsley Building SocietyYorkshire Building Society
CatholicChelsea
CheshireNationwide
DerbyshireNationwide
DunfermlineNationwide (and partly nationalised)
ScarboroughSkipton
The sad thing about all this is that many counties and communities have lost a society that has been supporting the local area for decades. The Government has recently said that it will try and help building societies in the future by giving them more flexibility over how they are funded, but it’s too late for some. It’s likely that those who remain will stay away from the riskier business areas that have caused them so many problems. This certainly seems to be the case for the West Brom. On Radio 4 this morning, its chief executive, Robert Sharpe, said that the society will go back to more ‘safe and boring’ business, i.e. simple deposits and loans for its customers.

Existing mortgage customers of the West Brom needn’t worry – all this won’t affect their loan or repayments. As for being a member though, we’ll have to wait and see how people react to a new group of ‘shareholders’ taking a stake in their society.

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