Building societies told MPs yesterday that they could not increase lending because they did not have enough funds to finance loans.
Mutual lenders use deposits to fund about two-thirds of their lending but had relied on wholesale markets, now frozen by the credit crunch, to finance the remainder.
Graham Beale, chief executive of Nationwide, told the Treasury Committee: "The disruption of the wholesale markets affects building societies as well as banks". He said his society, the country's biggest, had stopped targeting market share and now lent based on the amount of money available to its business.
Mr Beale was appearing before the committee with Iain Cornish, chief executive of the Yorkshire, and Neville Richardson, the boss of Britannia.
Societies have reduced mortgage lending and have struggled to attract depositors as banks, which paid little interest to retail savers during the debt boom, have chased retail funds to reduce their reliance on wholesale funding.
The Government is desperate to get financial institutions lending again to the housing market and small businesses to stop the recession turning into a slump. But the societies complained that the Government had put them at a disadvantage by nationalising banks such as Northern Rock so that depositors thought the state-controlled banks were safer than the mutuals.
They also said the Financial Services Compensation Scheme was an unfair burden on them because contributions were calculated according to retail deposits, punishing the societies for their safer, more traditional business models.