After the bank collapse last September, FSA insisted all financial institutions put larger amounts into their reserves as protection. Known as Tier 1 capital ratio the percentage was increased from around 5-6% to 8% to help prevent a Northern Rock-style run on the banks.

When Dunfermline's officials met the FSA in October 2008 they explained their difficulties as the valuation of their commercial loan portfolio had been hammered by the market collapse. There were also problems with a new IT system, which was not working properly.

The society had expanded hugely into commercial lending in 2004 because profit margins on home loans were hit by fierce competition from banks. The society's officials explained there was no problem with the liquid position, but asked for an injection of Treasury cash, through a bond scheme, to sort out their ratio.

The FSA refused and told DBS to set aside an extra £20-30m When the society tried to raise this, money markets had dried up and they were unable to get the cash.

"At this stage the DBS had a problem. It failed the FSA test and was put on the danger list," said the insider. "It's been heroic what the Dunfermline, as a relatively small player in the UK market, has been trying to do to keep its head above water. If it was a bigger, higher-profile institution more would have been done sooner," he added

However, DBS, Scotland's largest building society, argued that it was at an unfair disadvantage, not only caused by the UK government's bail-out of RBS and Lloyds Banking Group's takeover of HBOS, but by Northern Rock, which was also saved by the UK government yet, had been undermining the building society sector with its cut-throat home loans products.

Dunfermline's argument is that it had several billion pounds of members' mortgage assets and the mutual could work through this if it was allowed to borrow more with a bond issue backed by HM Treasury, a facility the government granted to the larger banks.

Suggestions that the society will announce a £26m loss now look to be an underestimate,  and the "provision" might be closer to £90m because of the UK's deteriorating property market. A provision is a write-down in valuation of a business, not necessarily a cash loss.

Dunfermline's troubles point to major structural difficulties in the UK's building society sector as larger societies are being forced to merge, while others are failing to meet more stringent regulations forced on them by the credit crunch.

The future of the society, owned by thousands of Scottish members and next door to Gordon Brown's Fife constituency, hangs in the balance as tentative merger talks with other larger societies have failed. Other societies are believed to be in similar position to Dunfermline and a forced merger to create large societies, orchestrated by the FSA, is one solution being considered.

Sunday Herald.