30 March 2009

Statement on the Dunfermline Building Society

Check against delivery

Mr Speaker, with permission, I would like to make a statement about the Dunfermline Building Society.

The House will understand that an announcement had to be made as soon as possible this morning – to provide certainty to the Dunfermline’s customers when branches opened this morning.

Mr Speaker, most of the society’s core member business has been transferred to the Nationwide Building Society this morning.

Under the terms of the agreement, it will be business as usual for customers and Dunfermline’s deposit business will continue to operate normally.

Branches and telephone banking will continue to open and customers can access their account in the usual way. Savers can be assured that their money is safe.

Loan and mortgage customers can continue to contact the Dunfermline in the usual way and continue to make repayments as normal. All of the Dunfermline Building Society’s staff have been transferred to Nationwide.

The decision to transfer Dunfermline’s main business to Nationwide was made to protect depositors, safeguard financial stability, as well as protect the interest of the taxpayers.

Mr Speaker, I would like to set out the background to this decision, and the options looked at by the Financial Services Authority, the Bank of England and the Treasury, in order to find a long-term solution to the society’s problems.

The Dunfermline Building Society has 34 branches, it employs about 500 people, and has around 300,000 members – making it the twelfth largest building society in Britain.

The decision was necessary because of a significant deterioration in the society’s financial position over the last few months.

This culminated in the decision by the FSA on Saturday that the Dunfermline Building Society was likely to fail to meet the FSA’s conditions to remain open for business – and that it was not reasonably likely that action could be taken by the society to enable it to satisfy these conditions.

Mr Speaker, the Dunfermline’s problems were caused by a range of factors.

The society has engaged in substantial commercial property lending, in excess of £650m, making many of these loans in 2005 and 2006 – when prices were at their highest level – and they are now losing money on many of these loans.

The society also purchased in 2006 and 2007, over £150m of high-risk, self-certified mortgages, from two American firms, GMAC and a subsidiary of Lehman Brothers – just before the global market for such loans completely collapsed.

These decisions, together with the need to write-off £10m from the purchase of a £31m IT system, contributed to the society making an expected loss of over £24m last year.

The FSA have been in constant touch with the society since November – as is properly the case, since the FSA is their lead supervisor.

It has been clear for some time that the society needed additional capital to continue operating.

It was clear that the society could not raise the amount of capital it required in the markets, and would need support from public funds.

Mr Speaker, under the Banking Act 2009, the Government has to take into account, in particular, three objectives when deciding whether to intervene in the financial sector:

The need to protect depositors;

Ensuring stability and confidence in the financial system;

And safeguarding the interest of taxpayers.

In meeting these objectives, the FSA, the Bank of England and the Treasury had two options.

The first option was for the Government to inject more capital into the society, possibly alongside the Building Societies Association and the Scottish Government.

The FSA advised that a minimum of £60m was required just to allow the society to continue trading.

This, however, would not have provided Dunfermline with a long-term solution:

First, it was the judgement of the Bank of England, the FSA, and the Treasury that even with an injection of £60m, the society would be very unlikely to have an independent long-term future, and that it would need to come back for more;

Second, it would not be able to service or repay this amount of new capital. In the last few years, they have never made an annual profit of more than £6m;

And third, it would not deal with the commercial property loans and the high-risk mortgages, totalling some £800m, held by the society.

So the second option was to find a long-term solution for the Dunfermline Building Society, where it had sufficient backing from a larger society and where the riskier assets were separated out.

It was therefore decided, after the Bank of England invited offers over the weekend, that as a result of that process core parts of the Dunfermline would be transferred to the Nationwide Building Society.

Dunfermline’s retail and wholesale deposits, its 34 branches, head office and their residential mortgages have been transferred.

Savers who are retail depositors with both Dunfermline and Nationwide will continue to benefit from separate Financial Services Compensation Scheme limits – that is, £50,000 per person per institution.

Nationwide already has over 40 branches in Scotland, where it has been operating for many years. It has the strength to provide financial support for Dunfermline.

Nationwide have said that they will maintain the Dunfermline Building Society brand, and that there will be no compulsory redundancies in branches for the next three years.

The social housing loans of Dunfermline’s customers have been transferred temporarily to a “bridge bank”, owned by the Bank of England.

This will continue to provide support for Dunfermline’s social housing commitments, while the Government talks to a number of other parties, including the Scottish Government, about securing a long-term future.

The remainder of Dunfermline’s assets and liabilities – including commercial loans, high-risk mortgages and subordinated debt have been put into administration.

These assets will be managed and wound down over a period of time. In this way, the return for the taxpayer can be maximised as conditions improve.

Any losses associated with these assets will be met in the first instance by the remaining capital in the society, and by the Financial Services Compensation Scheme, leaving a small residual exposure for the Government.

In line with previous resolutions of this kind, such as Bradford and Bingley, because the retail deposits have been transferred in full, the assets to back them had to be provided in the short-term by the Treasury.

Therefore, following normal practice in such cases, the overall net financing provided by the Treasury to Nationwide is around £1.6bn.

Included in this amount is a sum of £69m, an amount broadly equivalent to the capital reserves belonging to Dunfermline’s members. Again, following normal practice, this is being transferred along with the rest of the business, and will support prime residential mortgage lending.

The Treasury will reclaim the money from the wind-down of the assets outside the transfer and from the Financial Services Compensation Scheme.

Mr Speaker, the Dunfermline Building Society has provided services for many years. However, we had to find a long-term solution for the Dunfermline Building Society, protecting savers, protecting the taxpayer and giving members a more stable future.

We will continue to deal with the impact of the global banking crisis on the banking system, ensuring stability and rebuilding confidence – as an important precondition to economic recovery.

And I commend this statement to the House.