Dunfermline Building Society is expected to become the latest Scottish financial institution to lose its independence when it is taken over by new owners early this week.
The lender, Scotland’s largest building society, collapsed after the UK authorities— the Bank of England, Financial Services Authority and the UK government — decided it was no longer viable.
The decision infuriated Alex Salmond, the first minister, and was a surprise to the society’s board which had believed as late as midnight on Friday that it would get the chance to preserve its independence.
The Dunfermline board was confident that it had secured £30m from the Building Societies Association, and £25m from the Scottish government to help keep it afloat. Those pledges left it just £5m short of the £60m the board believed it needed to continue, and directors were hopeful the Treasury would step in to complete the package.
But UK government sources said yesterday the Treasury has concluded that a bailout would be poor value for taxpayers because it does not believe the society would be able to repay the money. Ministers believe a takeover deal could be in place as early as Monday.
The move, which will end the independence of an institution which has traded since 1869, was confirmed ahead of losses of more than £30m which are expected to be announced this week. While reports of the expected losses have not led to a run, the government feared this week’s announcement may have led savers to withdraw funds.
Salmond said he was “deeply disappointed” by the Treasury’s decision and called on the chancellor, Alistair Darling, to keep the option of a bail-out on the table to ensure it can continue as a going concern. He confirmed that the Scottish government had offered to help rescue the society two weeks ago by offering to take over some of its loans to housing associations.
“That offer remains on the table but it does require Treasury approval,” said Salmond. “We welcome the indications that social housing finance is also a priority of the Treasury but are deeply disappointed that the Treasury now believe it is not possible to sustain the society as an independent institution, given the importance to Scotland of HQ jobs and functions.
“We hope that the Treasury has not closed its mind to the idea that maintaining Dunfermline Building Society as an independent and ongoing concern could be the strongest option.”
In talks with companies, including the Nationwide, UK government officials will try and persuade potential owners that profitable parts of the society are an attractive proposition.
In order to safeguard 500 jobs, Darling is prepared to take over loss-making elements, including loan commitments, that bidders don’t want. The arrangement is similar to the break-up of Bradford and Bingley. Its savings business was sold to Santander, the Spanish bank, while the government took on its mortgages and other loans.
“What is happening will keep jobs, get rid of the uncertainty, maintain financial stability and get the best value for taxpayers and depositors,” said a UK government source.
The building society’s fortunes collapsed after becoming over-exposed with commercial property loans and sub-prime mortgages and investing £31m into a loss-making IT subsidiary.
This article, bylined Jason Allardyce and Ian Fraser, was published in the news pages of Sunday Times Scotland on 29 March 2009.