The collapse of the Dunfermline Building Society does not shake the foundations of the global financial sector in the way that the problems of RBS, Halifax and Citigroup did. Yet it could have serious implications for UK mortgage lending.
Largest building society to fail
The Dunfermline was Scotland's largest building society, the UK's 12th biggest building society and is the largest to fail in the current crisis. Other societies have also had to be rescued - the Derbyshire, Cheshire, Catholic, Barnsley and Scarborough - but all were fairly minor players. Dunfermline was not a giant, but was important.
Neither mortgage borrowers nor savers should suffer as a result of Dunfermline's problems. Its headquarters, branches and savings accounts are being taken over by the largest building society in the UK, the Nationwide - which has also protected the Derbyshire and Cheshire societies. Dunfermline's liabilities have become the responsibility of the taxpayer, via the Government.
Societies safer than banks
Generally speaking, building societies have survived the financial crisis in better shape than have most of the banks. The main reason for this is that societies are required by legislation to finance at least half their mortgage lending from their own depositors.
It was this restriction that prevented societies from expanding their lending during the property boom. It was also a factor encouraging some of the more ambitious societies to demutualise during the Thatcher years.
Demutualisation
The former building society Northern Rock boasted to a Parliamentary committee that it was only able to expand to the extent it did because it demutualised, enabling it to borrow extensively on the international inter-bank lending markets. This, ultimately, was the very factor that led to the bank's failure.
In fact, all the demutualised building societies have since collapsed (Northern Rock, Alliance & Leicester, Bradford & Bingley and Halifax) or become part of larger banking groups (Abbey, Cheltenham & Gloucester, Birmingham Midshires, Bristol & West, Woolwich, National & Provincial).
Excessive lending
All this matters to the health of the mortgage lending market. It was the demutualisation of the societies that was a primary factor in the expansion of the mortgage market - and the excessive lending and property price bubble that followed.
The practices of the demutualised building societies contrasted markedly with the more conservative practices that used to typify building societies. It was the demutualised lenders, particularly Northern Rock, that enabled the property bubble to inflate further by offering loans at nearly five times income and at 125% loan to value.
Ironically, it was those building societies that tried to copy these unwise lending practices that have since hit trouble. Dunfermline loaned too much on over-value commercial properties and, unusually for a building society, had a large exposure to sub-prime mortgage securities.
Cautious approach
Yet it is the usually cautious approach of the building societies that is threatening to lose them market share at present. Because building societies must raise at least half their finance for mortgage lending from depositors, rather than on the market, they must continue to offer attractive savings deals to depositors. Yet they must also operate on a margin above savings rates when they lend.
Consequently building societies' mortgage loan rates are, in many cases, at present not competitive with those of some of the banks. Currently the best buys on mortgages - as listed by the Moneyfacts financial comparison website - are from HSBC and its First Direct subsidiary. Only the Derbyshire (now a Nationwide subsidiary) and the Britannia are listed in the top six mortgage deals.
This is untypical as societies often dominate the top of the tables for the most competitive lending rates - reflecting their lower costs compared to banks that must pay dividends to shareholders.
Building societies are, after all, owned by their members, the very borrowers and savers who use them. And it is in the interests of those members that more building societies avoid the sad fate of the 140 year old Dunfermline Building Society.
But it is only if building societies remain true to their traditionally cautious approach to business that they are likely to remain an important part of the mortgage market.