The nickname for Irish Nationwide Building Society (INBS) among Department of Finance officials is "the unsinkable ship". Torpedoed early in the banking crisis by risky loans to property developers that turned bad, the small mutual has been steaming around in circles for nearly two years, but just will not sink.

Meanwhile, bigger freighters such as Anglo Irish Bank went down quickly after getting holed below the waterline first by catastrophic loan losses and then a series of scandals that engulfed its leadership. By contrast, Irish Nationwide's former chief executive Michael Fingleton sailed a bit more smoothly through the choppy waters. He retired last April vilified by the building society's members but with his enormous pension intact.

Perhaps when charting a course through the perilous seas of the banking crisis, it's better to be a one-man rowboat than the Titanic, the better to circumnavigate icebergs and U-boats.

But although it may technically still be afloat, INBS is listing badly, even as the safe haven of Nama comes into view this week. Leaks from inside the organisation suggest the institution is doing virtually no new business while burning through an ever-shrinking reserve of capital as both borrowers and depositors continue to flee.

One Irish Nationwide source says staff were told 10 days ago that the building society has been "living off reserves", but that these are now running out. The only hope for the bank, staff were told, is for the government to become a major shareholder through an emergency cash injection and then merge the retail part of the business with EBS. Management reportedly said an announcement would come after the budget.

The idea of a merger between EBS and INBS has been circulating for a couple of weeks, but the urgency expressed by INBS management is a new element. One source suggested that consolidation among the mortgage-focused institutions – EBS, INBS and PTSB – was only a matter of timing and structure, but that it sounded as if the urgency was heightened due to possible financial problems at INBS.

A spokesman for Irish Nationwide said rumours of a cash crisis were "totally untrue" – the institution has been successfully rolling over its debt financing under the government guarantee – but did not answer specific queries about dwindling capital reserves. A Department of Finance spokesman urged the Sunday Tribune to be "a little bit cautious" about calling time on the building society.

Yet the difficulties at Irish Nationwide are no secret. On the capital front, it fell below its minimum regulatory capital threshold of 11% in March 2008, according to its annual report last April. That was long before banking bad boy Anglo, which breached its minimum only after reporting devastating interim losses in the middle of this year; it was also long before the banking crisis had revealed itself as a systemic problem. And unlike its more notorious peer, INBS did not secure a derogation from the Financial Regulator giving it permission to continue operating without adequate reserves.

It is believed INBS is in negotiations with the regulator over a settlement that could result in a fine of up to €5m and disqualification of directors. A spokeswoman for the regulator would only say Irish Nationwide's disclosure about its 2008 capital breach is accurate and that the regulator "regards any breach of the capital requirements as a serious matter".

The regulator would not say whether INBS was still in breach of requirements, although it almost certainly is. New chairman Danny Kitchen told the AGM in May that the society was still in breach of the 11% minimum, with capital at 10.2%, or just over €1bn. Given that no new capital has come in since then, while the €8.3bn in commercial property and development loans are shipping devastating impairments, the capital situation must be even worse now.

INBS had a ninefold rise in bad debts in 2008, booking roughly €550m in general and specific impairments. Perhaps more troubling was the €545m of "incurred but not reported" impairments – a sign of the trajectory of write-downs. Worryingly, €3.2bn worth of loans – most of them commercial property and development loans rather than more reliable mortgages – were due to be repaid sometime this year. Given INBS's own commercial loan impairment levels of 11.4% at the end of 2008 and an industry-wide level now approaching 15%, the scale of likely provisions at the mutual could easily wipe out total reserves by the time accounts have to be closed on 31 December.

Nonetheless, INBS appears to be ploughing ahead – superficially at least – with its plan to shrink its balance sheet by winding down commercial lending and bumping up mortgage lending. In the past two months, new chief executive Gerry McGinn has surprisingly introduced several new mortgage products, but take-up is poor. According to a source in the building society, INBS has written only €1m in new business in the two months, while mortgage redemptions (people paying off or transferring loans) are "in the millions".

The consensus is that Irish Nationwide will not be around forever. EBS would dearly love its relatively strong deposit base – once its toxic loans transfer to Nama – but the capital crunch has to be sorted out first, and that will require real money fro­m a government desperately short of cash.