For those worried about their building society surviving the bad times, the media is reporting that those in trouble might be given access to the asset-protection scheme which is backed by the government.

Although good news, this move actually signals the Treasury’s deep concern over the state of the building society sector. This is mainly down to the government regulator, the Financial Services Authority (FSA), forcing all financial institutions to get ready for an eventual 50% fall in house prices and an even worse commercial property downturn of 60%.

Those societies deemed unable to cope with such a nightmare scenario might be propped up by the asset-protection scheme, one that is currently being used to offer support for the Lloyds Banking Group and RBS.

The West Bromwich Building Society, already featured in this blog, is one of the institutions on the FSA watch list. It is thought that it is being asked to show it could weather a £100 million loss on its commercial property book. Such losses could mean a fifth of its capital could disappear; something that is worrying the FSA.

And with holes in their capital bases, building societies, along with other financial institutions, could be forced to look out for fresh money to shore-up their balance sheets. Unfortunately, going to the markets might not be an option, with the government having rocked confidence with a decision that saw the coupon payments of a number of Bradford & Bingley debt instruments being cancelled.

So with the money markets in no mood to risk money in an increasingly fluid situation, the government’s help might be needed.

Guest Article by Neil Camp

Confidence in the already nervous financial sector has taken a further knock with the news that the West Bromwich building society was about to be rescued by a large rival.

Reports that the Financial Services Authority (FSA) has been putting together a deal which involves the Yorkshire and Coventry building societies, has angered the West Bromwich which says that it well capitalised and is not aware of any takeover talks taking place.

A spokesperson for the West Bromwich said: "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.

“The society has not received any indications from the FSA in relation to the results of this exercise, which commenced only recently. Furthermore, the West Brom has no knowledge of the FSA holding merger discussions relating to the society."

West Bromwich is said to have received special attention because of its keenness on not only the now unpopular buy-to-let domestic property market, but also the equally distraught commercial market.

But the building society has since explained that it got out of commercial lending over a year ago and also does not lend to the buy-to-let market, or the non prime domestic market.

The building society’s last annual report shows that it owns mortgage securities, considered as sub-prime, worth a total of £240 million.

West Bromwich would not be the first society with such a portfolio to be sorted out by the authorities. The Dunfermline was part-nationalised and the Britannia merged with the Co-Op.

City analysts believe that the building society sector is due for further consolidation as the global downturn takes its toll. The Nationwide has already swallowed up both the Derbyshire and the Cheshire. The sector still boasts 52 societies with 30 million customers.

Guest Article by Neil Camp