In a letter to chancellor Alistair Darling, Lord Turner states that several routes were proposed for the now defunct society.
One was to use the resolution powers included in the Banking Act 2009 to separate what he calls the good assets from the bad, with a subsequent disposal of good assets to another society or bank.
Another was an injection of additional capital from a consortium of members of the Building Societies Association which would be matched by investment of a like amount by the Treasury.
The BSA has confirmed that it was prepared to invest £30m on the basis of a matching public investment, subject to certain conditions.
In March discussions were also held with representatives of the Scottish government about it providing £25m of funding to help save the mutual.
To inform its choice between these options the regulator conducted a series of stress tests to determine the amount of capital that would be required to ensure the future of the society as an independent entity.
In his letter Lord Turner stated: “These tests showed that the injection of £60m would secure the society’s financial position over the next two years while alternative merger options were sought, but that £60m was not sufficient to secure the society’s long-term independent future in the FSA’s view.”
In the letter Lord Turner also reveals the timeline of events that led to the society’s demise.
In March 2003 a supervisory letter was sent to all societies, warning them about the risks of comm- ercial property lending.
This was followed by a speech by Graeme Dalziel, chief executive of the society in May 2004.
He said: “It is far from clear to us that all societies operating in the commercial, buy-to-let, equity release, sub-prime and self-cert markets have properly assessed the additional risks that inevitably go along with the higher margins available.”
In May 2006 a supervisory letter was sent to all societies warning of the dangers of mortgage book acquisitions. This led to the FSA requesting that societies should cease purchasing non-prime assets in October 2007.
As a result of this intervention Dunfermline declined to invest in a £160m loan book available from Credit Suisse.
Lord Turner says a tighter cap on commercial lending for mutuals could be one result of the Dunfermline saga and cites the society’s diversification into commercial lending as a major contributor to its downfall.
His 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 Lehman Brothers.
Lord Turner says the FSA is developing guidelines which will be issued in July which might impose constraints on the pace of societies’ diversification.
This could involve revisiting the legislative framework to allow for a tighter definition of commercial lending and a tighter cap on this than the current 25%.
A number of mutuals are also up in arms after having their credit ratings slashed by agency Moody’s in the wake of the partial nationalisation of Dunfermline.