Rescue deal for West Brom
The West Bromwich Building Society has been given a rescue deal that should secure its financial future.
The society was rumoured to be on the verge of collapse earlier this week, after the BBC’s Robert Peston reported that the government was planning to bail it out.
Instead, the West Brom has been given permission by the Financial Services Authority (FSA) to convert £182.5 million of debt into capital, which will then be used to shore up its finances. The deal, which should complete at the end of July, means investors will take a share in the mutual rather than simply owning its debt.
The society - which has 46 branches, almost 600,000 members and around 800 members of staff - says that the move will enable it to meet the FSA’s stress-testing requirements and continue to operate safely for both saver and borrower customers.
Robert Sharpe, chief executive of the West Brom, says: “The exchange of the society’s debt into capital materially strengthens our capital position and, under stress-test scenarios, has demonstrated our ability to withstand a further significant deterioration in market conditions.
“With this firm footing, we are well positioned for the future.”
Previously, it was expected that the government would announce some form of rescue for the society. It was suggested that it might be broken up, with savers transferred to another building society and other assets assumed by the Bank of England under the so-called “Special Resolution Regime”.
Alternatively, the FSA and the Treasury could have stepped in to protect the debt provided by investors and other financial institutions, allowing West Brom to either merge with another society or, less likely, continue as a standalone institution.
Last month West Bromwich had its credit downgraded by ratings agency Fitch, which cited the weak economy and increased risk of building societies defaulting. Despite this, the society maintained that it was a “safe and secure” home for its members' savings.
Several building societies have had to be rescued as a result of the ongoing effects of the credit crunch. Nationwide – by far Britain’s biggest building society - has stepped in with takeovers of the Cheshire and Derbyshire building societies while Leeds-based Skipton Building Society swallowed up the Scarborough Building Society.
The Chelsea and Catholic societies have merged, while the Yorkshire rescued its smaller rival in Barnsley.
Like many financial institutions, the West Brom it has found trading difficult as a result of drying up of wholesale money market funding that backed many mortgage products.
The company was also active in the buy-to-let market, that has been particularly badly hit by the credit crunch and where repossessions are running at around three times the level of those affecting ordinary mortgages.
Back in May the society responded to rumours that the FSA was looking to merge it with another society.
It stated: "In common with other financial institutions, the West Brom has been working closely with the FSA in relation to its funding and capital position, including the current stress-testing exercise being conducted on a number of the larger building societies.
"Over 12 months ago, the West Brom exited commercial lending and is no longer active in new buy-to-let or non-prime residential lending. The society has not acquired mortgage books from other lenders since 2006.
"The board of West Bromwich Building Society believes that the society is well capitalised, able to meet all its obligations in full and has a long-term future as an independent mutual society, providing a safe and secure home for its members savings and serving the local community."
An organisation owned by its members and managed for their benefit rather than the benefit of shareholders. Mutual societies include building societies, industrial and provident societies, such as co-operatives, credit unions and friendly societies. As they don’t have to pay dividends to shareholders, mutual societies generally offer lower mortgage rates and higher savings rates to their customers than banks.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.