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Chancellor Alistair Darling is set to call for stronger regulation of mutually owned banks and building societies alongside next week's Budget as he looks at new ways to return nationalised banks into private hands.
It is thought that the Treasury is looking at whether former building societies Northern Rock and Bradford & Bingley which have been nationalised could end up being owned by their savers and borrowers once more.
But any such plan is under immediate threat after a whistleblower accused the Financial Services Authority of "apathy and complacency" in its regulation of building societies during the boom years.
Vince Cable, Liberal Democrat Treasury spokesman, who was contacted by the whistleblower has written to FSA chairman Lord Turner asking to investigate the claims which he called a "scathing indictment" of regulatory failures.
The whistleblower is a former FSA supervisor who looked after smaller building societies and now works in the City. He said building societies had not only ramped up their own riskier loans but bought books of loans created by other financial institutions which they did not fully understand.
The recent collapse of Dunfermline Building Society was largely triggered by portfolios it bought from GMAC and Lehman Brothers.
The whistleblower said: "I witnessed trusting and naive provincial building society executives who had no real understanding of securitisation or structured finance being eaten alive by cynical, rapacious and short-termist investment bankers."
The number of building societies has shrunk by more than half from 110 to 53 since demutualisation was first permitted in 1986. In the last four months six societies have merged or been taken over. Nationwide absorbed the Derbyshire and Cheshire recently and took over Dunfermline's operations. That leaves it with £200 billion of assets more than six times the size of its nearest rival.
The FSA whistleblower said: "Current conditions differ crucially from those of the early Nineties recession when a few weaklings merged with larger societies - part of a trend which persisted for decades - but the overall sector emerged relatively unscathed with no need for outside assistance."
Darling is a fan of the mutual system and is keen to help it through the current financial crisis. The Treasury is also starting to look at how it could return some of the banks it has been forced to bail out to the private sector. Mutuality is one possibility.
One senior banker said: "The Treasury is actually rather enjoying running Northern Rock. It's found out that it's quite a good business taking money in from savers and lending it out to homebuyers. That sounds very much like mutuality."
