Lord Turner, chairman of the Financial Services Authority, says a tighter cap on commercial lending for mutuals could result from the bailout of failed society Dunfermline.
Turner has written to the chancellor Alistair Darling outlining the reasons behind Dunfermline’s downfall, citing its diversification into commercial lending as a main contributor.
The letter reveals that in 2008 the society had £628m worth of commercial loans on its book, a jump from just £112m in 2004.
Between February 2004 and March 2006 the society purchased buy-to-let portfolios worth £410m from GMAC-RFC and £57m from Lehmans.
Turner says the FSA is developing specific guidelines which will be issued in July which may impose constraints on the pace of any society’s diversification.
This may involve revisiting legislative framework to allow for a tighter definition of commercial lending and a tighter cap on commercial lending than the current 25% of total assets.
He says this might be justified on the ground that societies are less likely than large banks to have the credit skills required to do good commercial real estate lending
He also reveals that in October 2007 the society approached the FSA to say that it wished to purchase a mortgage book from Credit Suisse for £160m. But the regulator expressed supervisory concerns and the society did not proceed.
The FSA also worked with the Building Societies Association about the possibility of a capital injection from a consortium of societies as well as talking to three major societies about a possible merger.
But it became clear that any BSA offer would be conditional on public money also being invested. The BSA confirmed that subject to a number of conditions it was prepared to invest £30m and match £30m of public investment, but the FSA thought £60m would not be enough to secure its future.