Page last updated at 10:18 GMT, Monday, 30 March 2009 11:18 UK

Building societies: State of the sector

By Anthony Reuben
Business reporter, BBC News

A branch of Dunfermline Building Society

Building societies have, on the whole, coped better than the banks through the credit crunch and recession.

Indeed, some of the worst-hit institutions have been former building societies that decided to demutualise, such as Northern Rock and Bradford and Bingley.

But mutually-owned societies have not been immune, as was shown by the Dunfermline Building Society having to be taken over by the Nationwide, while its riskier assets were taken on by the government.

In November, Skipton Building Society agreed to merge with the smaller Scarborough Building Society, after the latter said it had suffered from "difficult trading conditions".

In October, Yorkshire Building Society took over Barnsley Building Society, which said it was protecting itself against the possible loss of up to £10m deposited with Icelandic banks.

In September, the Nationwide agreed to stage a rescue takeover of the Cheshire and the Derbyshire.

Stricter rules

The amounts of money involved appear relatively small to people jaded by the amount of money needed to bail-out the likes of Royal Bank of Scotland and HBOS.

But building societies have a particular problem when they get into trouble.

Banks have the option to approach their existing shareholders for more capital, but building societies are owned by their savers and borrowers, so that option would not work.

It remains the case that the UK's building societies have weathered the recession better than our commercial banks
Robert Peston, BBC business editor

Banks in trouble have also tried exchanging large stakes in themselves for capital injections from the government, which also would not work for a mutual.

While they may find it more difficult to get out of trouble, the big benefit for building societies has been that they have not got into as much trouble.

The stricter rules governing what they can do with their money have protected building societies from the worst excesses of the sub-prime crisis.

BBC business editor Robert Peston says that barring an economic disaster, no other substantial building society is expected to need rescuing in the way that Dunfermline has.

The building societies appear to be benefiting from the perception that they have not been involved with gambles on the sort of toxic debt that the banks have been saddled with - and, indeed, they have stuck more closely to the model of lending mainly money that they have received from savers.

Nationwide, the biggest building society, has based an entire advertising campaign on being boring and this stage of the recession may indeed be a good time to be dull.

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