An inquiry by the All Party Parliamentary Group for Building Societies and Financial Mutuals into diversity in the financial markets said the government must “fully consider” remutualising Northern Rock and make the advice it receives on the matter public.

Its report said: “The group believes that the government is faced with clear choices, and notes with disappointment the Chancellor’s Mansion House speech, in which he stated the government’s aim to sell Northern Rock.

“Ultimately, this may be the right decision, but it can only be made once the option of re-mutualising Northern Rock has been fully evaluated.

“This has clearly not yet happened.”

The APPG said it “makes sense” to remutualise a mature ex-mutual business in order to increase competition, given the difficulties posed in setting up a mutual of any size in the deposit-taking sector.

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In particular, it voiced its concern over the effect on competition that the government bail outs of banks have had on the mortgage and savings markets, where taxpayer supported firms have become more dominant.

The MP group said that mutuals have proved more stable than banks in the downturn and the creation of a new, large building society “would send a strong signal that [the government] supports institutions that do not take unnecessary risk”.

In addition, it said that the Treasury must not “inadvertently skew competition” through its attempts to stabilise the market by giving advantages to failed banks in public ownership.

The report said: “”Northern Rock, an ex-mutual, remains a relatively straightforward and mature savings and mortgage business. As such, it is particularly suitable for resumption of mutual ownership.”