The future of the country's biggest banks is somewhat clearer following the government's decision to effectively nationalise AIB just before Christmas, meaning attention will shortly turn to the smaller players as the race to take over EBS building society nears a conclusion. The bidding process for the building society is due to end in just over a week with the lodging of final offers with the National Treasury Management Agency, which is in charge of the state's banking policy.

The battle has been whittled down to just two bidders – Irish Life & Permanent and the Cardinal consortium – after a lengthy process that saw several international private equity groups make indicative offers to take over the building society.

Having got into the development property market late in the game, the EBS was saddled with about €1bn of toxic loans when the bubble burst. Although chief executive Fergus Murphy (who was only appointed in early 2008) made an effort to front up to the losses well before other banks, the building society has still required a government bailout after taking steep haircuts on the loans it has sold to Nama.

On paper, what should be an easy decision – picking a winner that results in the least possible further cost to taxpayers and ensuring the EBS survives – is likely to take some time and turn out to be a difficult choice.

As the only lender that hasn't required a taxpayers' bailout, Irish Life & Permanent was seen as favourite by some analysts to be named as the preferred bidder by the NTMA. Irish Life & Permanent has long coveted EBS, which has a healthy level of deposits that would reduce IL&P's reliance on wholesale funding. Stitching together IL&P's banking division with EBS would create the long-talked-about "third force" in Irish financial services, rivalling Bank of Ireland and AIB in the mortgage and savings market and offering choice to consumers at a time when other banks are shrinking.

But there are some fears that if Irish Life & Permanent is chosen as the preferred bidder for EBS, it would eventually lead to a large number of job losses at the building society's head office and the closure of some EBS branches – a suggestion rejected by IL&P. The company has offered a stake in the combined business to the government as a sweetener to secure EBS.

The alternative buyer for EBS is the Cardinal consortium, which boasts some of the biggest international investors among its backers. Cardinal Asset Management, a Dublin investment vehicle fronted by Nigel McDermott and Nick Corcoran has teamed up with the US private equity firm Carlyle and billionaire investor Wilbur Ross. Cardinal has been knocking on the door of the Irish banking sector for more than two years now without getting a deal completed. As part of the Mallabraca consortium, it expressed an interest in buying Bank of Ireland and Irish Life & Permanent.

While the initial momentum was behind IL&P winning the battle, some sources say that attracting international investors to the Irish financial market has become a priority, especially since the government took control of AIB last month. According to one source, getting major players like Carlyle and Ross into Ireland would show that the country's banking system is viable without state support.

But selling EBS to private equity wouldn't be without risk given the reputation that private equity firms have for slashing costs to recoup their investment. And Wilbur Ross hasn't done his side any good by saying Cardinal would consider a form of debt forgiveness for mortgage holders if it was successful. Central Bank governor Patrick Honohan and Financial Regulator Matthew Elderfield have both shied away from supporting debt forgiveness as a way to help struggling homeowners.

While final offers are due to be submitted to the NTMA on 17 January, it will be some weeks before a preferred bidder is selected and an overall agreement reached, according to sources. For a start, the Central Bank and Financial Regulator are still in the process of assessing the liquidity and capital requirements of the country's financial institutions. That needs to be completed by around the end of March and is taking up considerable resources and time.

In the meantime, Irish Life will also have to raise €100m to reach its new core tier 1 capital requirement of 12%. Although the figure is relatively modest compared to the capital needs of other banks, IL&P will be in the market at around the same time as Bank of Ireland, which is likely to seek as much as €1.5bn from investors.

The choice facing the NTMA and the government is between the private equity team who are untested in Ireland but who plan to bring fresh capital to the financial system, or an existing, established bank.

No matter who wins control of EBS, the state is unlikely to get back much of the €875m in capital it has already provided to the building society.