The Building Society Associaion (BSA) has warned that the fight to attract retail deposits and moves to tighten regulation will force up the cost of mortgages in the future.

In a speech at the annual BSA lunch, chief executive Graham Beale said that new rules on the type and amount of capital that building societies will need to put a side against new lending could have a damaging effect on the industry.

He also warned that building societies are struggling to attract vital new savings deposits. Mutuals are competing against state-owned and state-controlled banks, such as Northern Rock and Royal Bank of Scotland, which are offering competitive savings rates to attract deposits.

National Savings & Investments, the Treasury-owned savings provider, is also currently promising competitive returns on its savings accounts. A fortnight ago it launched a one-year fixed-rate bond with a market-leading interest rate of 3.95 per cent.

Mr Beale told the audience: "The demand for retail deposits is so intense that rates have been pushed up in some cases to uneconomic levels.

"This is often by institutions that carry real or implied unlimited guarantees because of their full or part state ownership...at some point savings rates will fall in relative terms or more likely the cost of borrowing will increase."

New financial regulations which are designed to prevent banks from becoming exposed to bad debt in future will put further pressure on the cost of loans, he warned.

In particularly, new capital adequacy rules which will increase the amount of cash that banks and building societies have to hold against new lending will make it more expensive for lenders to provide mortgages and other financial products in the future.

He argued that the Financial Services Authority should ensure that new proposals take into account the position of building societies.

Mr Beale also defended the role of building societies in society. He said: "Lord Adair Turner expressed a view that banks are socially useless. He may or may not be right. What I do know is that building societies are of profound benefit to local communities throughout the UK and society generally".