Jeremy Warner: West Bromwich saved for the nation?

Outlook West Bromwich Building Society seems to have won a reprieve. By persuading holders of £182.5m of subordinated loans to convert their debt into instruments that would qualify as core tier 1 capital, West Bromwich hopes to avoid enforced merger with someone else, or the even more unpalatable end of falling victim to the Government's shiny new special resolution regime, the fate that befell its sister building society up in Dunfermline.

I will believe this when I see it, but having sanctioned the creation of the monopolistic Lloyds Banking Group, the Government is desperate to save the mutual model so as to maintain diversity in UK financial services, so it is just about possible that West Brom will stagger on as an independent. Not that this West Brom is going to provide much competition to Lloyds, but I guess anything is better than nothing.

When the banking crisis first broke, it was the converted building societies that everyone worried about. Fired up by the prospect of big bonuses for senior executives, they had then gone hell for leather for growth and ended up overstretching themselves. All of them have now been either closed, subsumed into something else, or nationalised.

Yet some of those who remained in the mutually owned sector have turned out to be just as reckless. Like Dunfermline, West Brom turns out to have been overweight in commercial lending and high-risk mortgage lending such as buy-to-let. Mutual ownership, is seems, was no guarantee of good behaviour.

As it happens, the bigger building societies seem to be basically all right, and so too do the tiddlers, the ones that have stuck to their core purpose of deposit taking and mortgage lending. In some cases, the chief executive of these tiddlers will know all his customers by name, rather as if he were behind the counter in the village shop. Some of these smaller building societies are as much part of the local community they serve as the local school or doctor's surgery, and are much to be encouraged.

It is the middle-ranking building societies which the FSA has had to worry about, the ones that developed ambitions beyond their status and tried to play with the big boys. Dunfermline and West Brom were among them. One or two others are going to have to be dealt with over the months ahead too.

A return to the basic principles of community banking is an obvious way forward for an industry which has lost the trust of its customers by playing fast and loose with their money. The main elements of the building society model is still essentially fine, even if many of the problems that now beset the movement could have been avoided had not the regulatory regime been tampered with by successive governments in the rush to liberalisation.