Building societies could see their funding rules relaxed to boost their appeal as an alternative to major high street banks under proposals unveiled by the Government.
The Treasury is considering allowing mutuals - such as Nationwide, Chelsea and Yorkshire building societies - to raise more funding from so-called non-members. Members include customers with mortgage borrowing and shareholding investors.
Building societies can currently only source 50% of their funding from non-members.
The Treasury's vision for the sector, which will go to consultation, sets out how the recent recommendations of the Independent Commission on Banking will apply to the building society sector.
The ability for societies to source increased funding from non-members would be an advantage if wholesale money markets became cheaper in the future. However, wholesale funding is currently expensive due to the struggling economic climate and building societies raise around 75% of their funding from members.
Adrian Coles, director-general of the Building Societies Association, said he welcomed the Government's focus on building societies.
He said: "Our sector is diverse and provides services to around 25 million customers, through a model that is very different both in structure and ethos to the plc banks. I would echo the high level principles set out in the paper for building societies to be able to compete fairly, free from inappropriate burdens and maintain our distinctive approach and lower risk business model."
The Treasury also said building society legislation will be aligned with ring-fencing requirements outlined by the ICB to ensure a level playing field with the banks. The Government has said it will ensure ring-fencing changes apply to societies by amending the Building Societies Act to avoid confusing mutuals with two separate pieces of legislation.
Loss-absorbency proposals - such as building up protective cash buffers - will also apply to building societies in the same way as to banks of a similar profile, the Treasury added.
Financial Secretary to the Treasury Mark Hoban said: "The Government has committed to increasing choice and diversity in financial services. We believe that building societies can play a vital role in this."