The body representing Britain's mutually-owned lenders has complained to Europe's competition regulator about a planned restructuring of state-owned bank Northern Rock.
The Building Societies Association (BSA) has told the European Commission that Northern Rock should be made to pay financial penalties to maintain a level playing field if the proposed overhaul goes ahead.
The Commission is currently scrutinising the restructuring plan to make sure it does not breach EU state aid rules, and is due to deliver its verdict in the autumn.
A negative verdict would mark a setback to the British government's efforts to restore Northern Rock to financial health and sell it back into private ownership.
Under the restructuring plan, Northern Rock is expected to split itself into two entities. An operating company will comprise the bank's deposits and lending activities, while an asset company will contain its mortgage book, which has been hit by a rise in bad debts as the recession takes its toll on borrowers.
In a report delivered to the Commission last month, the BSA said allowing Northern Rock to lend without the burden of bad loans would give it an unfair advantage over its competitors.
It said the bank should be made to pay an 'annual premium' to the British government to cover the cost of setting up the asset company.
The BSA also called for the removal of the government's guarantee on Northern Rock's retail and wholesale deposits, which it said allows the bank to obtain cheaper funding than its rivals.
Northern Rock became the first major British casualty of the credit crunch in September 2007 after rising wholesale borrowing costs left it unable to fund itself. The bank, kept afloat by government loans, was nationalised in February 2008 after efforts to find a private sector buyer for the group fell through.
The BSA represents 52 customer-owned lenders with combined assets of £375 billion, including Nationwide, the UK's third-biggest mortgage provider.
