West Brom BS to be rescued
West Bromwich Building Society, Britain's eighth largest building society, will be rescued within the coming days, I have learned.
An announcement could even come later today.
The UK's eighth largest building society may be broken up, with its savers transferred to another building society and its assets taken over by the Bank of England under the so-called Special Resolution Regime.
This was what happened to Dunfermline Building Society earlier this year.
However the Financial Services Authority and the Treasury are also exploring the possibility of converting some of the debt provided by investors and financial institutions to West Brom into a new form of capital.
This could allow West Brom to keep its independence or to merge with another society in a more normal kind of way - because the new capital would be available to absorb whatever losses the society incurs on its loans.
I am told that right now it is touch and go which of the two solutions will be adopted.
Either way, it is clear that savers at West Brom will not lose a penny - and that it should be business-as-usual for the society's mortgage borrowers.
West Brom has around 350,000 customers, 46 branches, 850 staff and total assets of just under £10bn.
It has run into difficulties because of actual and potential losses on its substantial portfolios of commercial-property loans and buy-to-let mortgages.
West Brom is also more dependent than some societies on wholesale funding, which has become harder to obtain. Just over 30% of its funds come from wholesale sources, as opposed to ordinary retail savers.
The society has lent £1.5bn to commercial property companies and projects, at a time when the property industry is suffering its worst recession for decades.
It also has made £3.1bn of buy-to-let mortgages: many analysts predict that arrears on buy-to-let loans are set to escalate.
West Brom's stock of prime owner-occupied mortgages is just £2.6bn.
The building society sector is going through something of a reconstruction.
The very biggest societies, Nationwide and Britannia, have coped well with the difficult credit-crunch conditions of the past 22 months.
And the very smallest societies, which did not diversify into commercial property and did not raise funds on wholesale markets, have also remained pretty robust.
But the FSA, the Bank of England and the Treasury fear that many of the medium-size societies are perhaps a bit too small to thrive in an economy where access to funding has become more difficult.
So there are likely to be further building society mergers in the months ahead.
That said, West Brom is the only society which is in need of fairly urgent repair.
UPDATE, 15:33: If West Brom is rescued by what would in effect be swapping debt for equity, the Treasury would probably subscribe for some of this newfangled Tier 1 capital too.
So there would be a bit of a first: taxpayers would have a stake in a building society (we'd own the equivalent of preference shares, or - for the delectation of the wonks among you - some kind of reconstructed permanent interest bearing shares, the legendary PIBS).
UPDATE, 16:38: The Treasury won't on this occasion subscribe capital to the rescue. Taxpayers won't be taking a stake in West Brom.
So the choice for West Brom's institutional creditors is to convert some of their debt into quasi-equity or see the society broken up and put into the Bank of England's Special Resolution Regime.
Where will the savers end up? Well in the industry the neighbouring Coventry Building Society is tipped as the new home for West Brom's savers.