Call for building societies to close ranks

Updated: 10:55 EST, 21 May 2009

The head of the Building Societies Association has told members to keep quiet on the financial strength of rivals for fear of triggering the collapse of another institution.

The chair of the Building Societies Association, John Goodfellow, told the industry's annual conference yesterday that societies had several challenges to face over the next year if they are to survive in a sector rife with rumours as to which institution will fail next.

While hitting out at the Government for cutting interest rates too severely, Mr Goodfellow acknowledged some societies were not up to par, namely Dunfermline Building Society, which was bailed out by Nationwide and the Treasury last month.

Goodfellow: 'The Dunfermline episode shook us all. Clearly it expanded unsustainably in some areas that it did not fully understand.... But no-one can foretell that the same episode will not happen again.'

He warned societies not to comment on the profitability of their peers in the current climate, given general anxiety over the stability of the sector. For example, West Bromwich Building Society was forced to deny reports at the weekend that it is on the brink of financial meltdown.

He said: 'The Dunfermline episode shook us all. Clearly it expanded unsustainably in some areas that it did not fully understand and at great cost to the reputation of the sector as a whole. But no-one can foretell that the same episode will not happen again.

'We're a small village and we talk, but talk can be damaging. Think carefully before you say anything about your society or someone else's society.'

Societies have been battered over the past year by low interest rates, unfair competition from Government-backed banks and rising numbers of customers defaulting on their mortgages,

In addition, they also have to face increased payments to the Financial Services Compensation Scheme set-up to compensate the customers of failed institutions, and the fallout of reckless expansion by over-eager management teams.

Society mismanagement

The City watchdog, the Financial Services Authority, lashed out at the slow pace with which some societies reacted to the financial crisis triggered by the Northern Rock fallout.

Hugh May from the FSA said: 'The fact remains that a lot of societies did not react appropriately to the start of the crisis and some saw it as a growth opportunity... High risk lending continued throughout 2008.

'We really did warn you about all this before the risk crystallised. Those that did can look slightly smug at this time. We take some responsibility for not being intrusive enough, but may I remind you that it was the responsibility of management to create safe business models.'