Concern is mounting that Irish Nationwide Building Society (INBS) is running dangerously low on capital reserves ahead of the proposed transfer of €8.3bn of its loan book to Nama.

Meanwhile the Irish government will table proposals in the new year for a new "special bankruptcy procedure" allowing the government to deal with banks in distress. The banks could be sold, wound down or taken into public ownership.

The Department of Finance confirmed last week through a spokesman it was working on such proposals. It is understood the government would be able to wind up Irish Nationwide and/or Anglo Irish or sell off their constituent parts.

Whether the government would take such a step ahead of the renewal of the bank guarantee scheme in September 2010 is not clear.

Sources in both the banking sector and Finance believe time is running out on Irish Nationwide as high levels of impairments in its commercial property portfolio continue to erode its capital base.

According to one source, executives at the building society told middle managers 10 days ago that reserves had been almost depleted and that government recapitalisation was necessary if it was to survive much longer.

This would most likely be a prelude to a merger of Irish Nationwide's savings and mortgage business with rival EBS – which could be announced as early as the second week of December, the source said.

A spokesman for INBS declined to answer questions about the building society's capital position, but said the institution's liquidity was "sound". Last week Irish Nationwide added another €500m to a €2.3bn government-guaranteed bond issue from May, bolstering its funding.

It had been widely expected that Irish Nationwide would need a substantial capital injection – estimated at around €1bn – to cope with the writedowns associated with the transfer of its poorly performing commercial property loans to Nama, expected to begin early in 2010.

But it is believed the deterioration of these assets has already put significant pressure on the mutual's dwindling reserves.

Irish Nationwide dropped below its regulatory capital minimum of 11% back in March 2008 and had not improved its position as of the annual general meeting in May. Since then, the institution has not raised any additional capital.

With €3.2bn in loans due this year alone and €545m in "incurred but not reported" impairments reported in the 2008 accounts, it is likely that much of the €1bn in reserves recorded at the end of last year have been consumed by losses.

It is believed this capital weakness is behind recent reports speculating that Irish Nationwide's mortgage book and deposits will shortly be "backed in" to EBS to create a single building society, which would be the third-largest mutual in Britain and Ireland after the Nationwide (UK) and Britannica. Neither the Department of Finance, IL&P or EBS are ruling out Permanent TSB's later inclusion, which will be enabled by a planned restructuring scheduled to follow the group's extraordinary general meeting on 17 December.