Unless building societies overhaul their management systems and move to deal with increased capacity, they may be unable to withstand any further shocks from the global credit crunch, the head of the Financial Services Authority (FSA) has stated.

In a speech to the Building Societies Insurance, Hector Sands warned that those mutual lenders who had not yet upgraded their computer systems and planned for a fall in consumer confidence could find themselves in deep trouble.

He told conference attendees: "Many of you have not modelled sufficiently extreme stress scenarios. A constructive approach for boards would be to ensure they understand the circumstances both financial and operational under which their institution would fail and determine whether that is an appropriate risk to take."

Furthermore, Mr Sands also warned that many mutual lenders are still overly complacent when it comes to dealing with bad debt.

Unlike big banks, building societies are unable to initiate rights issues or raise money from sovereign wealth funds and therefore they need to take extra precautions to maintain surplus levels to support capital.

The FSA chief also told building societies that they must make every effort to help those homeowners struggling with mortgage repayments and treat them fairly so as to avoid a significant growth in repossession levels.