Barnsley Building Society has been forced to seek a rescue merger with Yorkshire Building Society after facing up to £10 million in losses on cash it saved with Icelandic banks

Steve Mitchell, acting chief executive of Barnsley, said that the society's reserves could have absorbed the potential losses but that it would have undermined the stability of the mutual. As a result, Barnsley had approached Yorkshire to offer members a "more secure future", he said.

Barnsley had deposits with Icelandic banks Kaputhing Singer & Friendlander and Heritable, a subsidiary of Landsbanki. Both banks are in receivership, which means that commercial customers are likely to receive just a small percentage of their money back.

Retail customers' deposits are guaranteed up to £50,000 after the UK Government recently increased the level from £35,000.

Yorkshire said that, after the merger, it would pursue the Icelandic banks for the return of Barnsley's assts and, if this was successful, a payment might be made to the society's members.

Yorkshire said previously that it has no exposure to the Icelandic banks.

Yorkshire will retain the Barnsley brand and eight branches. Barnsley mortgages and accounts will move to Yorkshire, which means that, on the current terms offered by the societies, customers will gain from lower interest rates for mortgages and from higher rates for savers.

Iain Cornish, chief executive of Yorkshire, said: "This merger is a further step in demonstrating the strength of the mutual sector in the UK, with complete certainty to customers maintained at no cost to the taxpayer".

The members of Derbyshire Building Society will meet today to discuss the building society's merger with Nationwide, announced last month. The Cheshire Building Society is also merging with Nationwide.

Yorkshire is Britain's third-biggest building society with 1.9 million members and £20 billion of assets, while Barnsley has 60,000 members and £376 million in assets, making it the country's 34th largest society.

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