If Alistair Darling really wants to bolster Britain’s building societies he had better hurry up. There won’t be many left at this rate.

West Bromwich Building Society, the eighth largest, yesterday seemed to have bought itself a bit more time. But its days as an independent lender still look numbered.

West Brom, which has £1 billion of rapidly souring commercial property loans and £3 billion in buy-to-let mortgages, was last night negotiating with bondholders to convert their £182.5 million of subordinated debt into a new instrument that would be treated as equity.

This should give it enough capital to soldier on for a while. But a merger with another society looks the most likely end game.

West Brom appeared to have persuaded the holders of the subordinated debt to convert into riskier capital, perhaps because the possibility that the Government might arrange a rescue, along the lines of the Dunfermline Building Society, has concentrated minds. In the Dunfermline case, bondholders are likely to be wiped out.

One of the snags with mutually owned businesses such as building societies is that it is difficult for them to raise new capital. A Treasury White Paper due shortly is expected to suggest the creation of a new instrument that would make it easier. West Brom appears to be the guinea pig.

The problems faced by West Brom are depressingly similar to those at Dunfermline, with the same combination of management mistakes and regulatory failure.

West Brom expanded aggressively into commercial and buy-to-let lending as allowed by the progressive relaxation of controls on building societies over the past 20 years. It was also unusually reliant on wholesale funding rather than retail depositors.

The Financial Services Authority issued repeated warnings about the dangers of commercial property lending by building societies from 2003 onwards. But the warnings appeared to go unheeded and the FSA did little directly to curb this build-up of risk until it was too late.

After Dunfermline’s collapse, Lord Turner of Ecchinswell, the chairman of the Financial Services Authority, suggested there could be tighter rules to constrain building society lending. And the FSA is about to issue guidance on the controls and expertise that it will require of societies for given levels of non-traditional lending.

But Lord Turner argued that more intense supervision would not have made much difference. He pointed out that in December 2007, Dunfermline’s auditors were concerned that the society’s bad loss provisions might be too high rather than too low. “It is not clear that FSA supervisors could have been more effective in spotting future possible credit problems at the individual firm level than were the auditors.”

One downside of more intense supervision would have been the cost, given the large number of building societies.

But at least that potential problem is waning. The Nationwide may have had its fill of struggling small fry but the Government seems keen to encourage more mergers. West Brom is unlikely to be the last building society to be swallowed up.

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