Jeremy Warner: Nemesis of the mutually owned building societies

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The Independent Online

Outlook: First, Dunfermline Building Society went bust; then Moody's downgraded the credit rating of nine smaller building societies, some of them to only just above junk; now a self-styled "whistle-blower" comes forward to claim that the Financial Services Authority had stood idly by while building societies expanded their lending into ever more risky areas and were "eaten alive" by avaricious investment bankers.

Building societies were meant to be the trustworthy, low-risk face of banking; now it appears that many of them are as much in the do-do as the rest of the banking sector. Their mutually owned status and more demanding regulatory framework has done little to save them from the temptations of the boom. To the contrary, lack of accountability may have made some of them proportionately even more reckless in their lending activities than the major banks. Deregulation of the sector under the previous government, allowing building societies a freer hand in the way they borrow and lend, scarcely helped.

But first, let's lay to rest the preposterous notion that the former FSA supervisor who has come forward – anonymously – with allegations of lax regulation is some kind of whistle-blower. In fact he seems to have been one of the very regulators he's accusing of being asleep at the wheel. In any case, the mystery mole seems to have been part of a clear-out of self-evidently useless personnel that took place in the wake of the Northern Rock fiasco. Now the presumed male has gone to Vince Cable, the Lib Dem Treasury spokesman, and in suitably colourful language accused his former employer of a whole host of regulatory failings.

The term "whistle-blower" might be warranted if there was any evidence to suggest that he had warned his superiors of reckless lending among the building societies. No such evidence is offered. The former FSA supervisor seems to be whistleblowing largely on himself.

As for allegations of lax regulation, there's scarcely anything new in this. The FSA has already admitted to specific failings in its regulation of the banking sector. The new chairman, Lord Turner, has also conceded that the whole approach to regulation, which rested on the belief that markets were largely self-correcting, was misguided.

Building societies have traditionally been more hemmed in than banks in terms of what they are allowed to do, but even in their case, the rules have been considerably eased over the years, allowing them a freer hand in terms of funding and lending activities.

Some of them, such as Dunfermline, used these new freedoms to expand aggressively into commercial lending and higher-risk forms of mortgage lending. It scarcely needs saying that they didn't really understand what they were doing. They were innocents abroad.

Not that the ones which converted into publicly listed banks were in any way wiser. All the former building societies that converted during the greed-fuelled demutualisation of the 1990s, from Halifax to Northern Rock and Bradford & Bingley, have ended up coming a cropper. They all ran into the same combination of funding and solvency issues which now bedevils the smaller building societies. The Government had to pay Nationwide to take Dunfermline off the taxpayers' hands. Some of the others may not be so lucky. Virtually all of them were subjected to "stress testing" by the FSA when applying for the Government's credit-guarantee scheme. Dunfermline failed, but the rest of them seem to have passed, suggesting that the situation for the remaining tiddlers may not be quite as bad as the "whistle-blower" thinks.

Whatever. The bottom line is that the entire banking system only continues to exist courtesy of the taxpayer right now. The Government's implicit guarantee of bank deposits makes us all believe our money is safe, but if you want to know who is underwriting your account, just take a look in the mirror. It's you and me.