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."