Rock to be sold after watchdogs clear split

European competition watchdogs have agreed that Northern Rock could be split into a "good bank" and a "bad bank" - but British taxpayers will have to inject a further £8 billion ($18 billion) to achieve the separation.

The Rock's chief executive, Gary Hoffman, also admitted it could take 10 years for all state support to be paid back.

In a separate development, Robin Budenberg, a senior banker at UBS, was appointed to manage the sell-off in his new role as chief executive of UK Financial Investments, the body which supervises the Treasury's stakes in bailed-out banks.

As part of the deal agreed with EU regulators, Northern Rock will be required to limit its lending to £4 billion this year, £9 billion next year and £8 billion in 2011. Deposits will also be capped at £20 billion until 2011, and the bank will not be allowed a top-three ranking in Moneyfacts mortgage categories for two-, three- or five-year fixed or variable mortgages before the end of 2011.

In return for this, Northern Rock - which has already received £15 billion of taxpayers' money - will have a further £8 billion injected by the Treasury. It will be able to call on a further £4 billion of "stand-by" liquidity capital, bringing the state's total dowry to £27 billion.

All of this debt will be held by Northern Rock Asset Management, the "bad bank". It will consist of up to £60 billion of mortgages, including the controversial 125 per cent loan-to-value "Together" products, and those linked to various securitisation vehicles and bonds.

Northern Rock insisted that 90 per cent of these were still "performing" but the 10 per cent that are not add up to a hefty potential bill for the public purse. The "good bank" will contain £19 billion of deposits, £8 billion of cash and £10 billion of low-risk mortgages.

The EU competition commissioner, Neelie Kroes, said yesterday: "The failure of Northern Rock would have had major detrimental effects on the UK mortgage market and the overall financial stability of the UK economy."

Hoffman, the former boss of Barclaycard, will continue to run both halves of the bank, at least until the sell-off.

While new non-executive directors are being sought to join the boards of the two bank divisions after the split, that will probably raise eyebrows among corporate governance watchdogs.

The sale will kick off in earnest next year. The Government wants to see three new competitive banks created from Northern Rock and parts of Lloyds and Royal Bank of Scotland, which the EU will demand as a result of their bailouts.

Richard Lambert, the director- general of the Confederation of British Industry, said: "We welcome the EC decision. When parts of Northern Rock come to be sold, this must be done in a way that delivers a good deal for the taxpayer and leads to greater competition in the UK banking sector."

But Vince Cable, the Liberal Democrat treasury spokesman, said: "The Government should resist the temptation to use Northern Rock for its own political ends by selling it off before the general election. While the EU is right that there should be greater competition in the financial sector, splitting Northern Rock into 'good' and 'bad' banks risks leaving the taxpayer with the scraps."

Phoenix from the ashes

If anyone two years ago had described Northern Rock as the "belle of the ball" they would have been laughed off stage. But after all the junk has been carved out of it, with the help of a £27 billion ($61.5 billion) dowry from the taxpayer, that is what it will be.

Even with the EU-imposed constraints on new mortgage lending and even if the state guarantee on savings deposits doesn't apply to deposits with a new owner, Northern Rock offers a solid foundation to build a new bank.

Government sources say a key aim of the sell-off will be that the new owner is capable of enhancing the competitive landscape of UK banking.

That aim will also apply to the sale of parts of Lloyds Banking Group and Royal Bank of Scotland. The EU may yet demand much larger disposals than these banks would like - just ask Dutch bank ING, which was told to split itself in two. But what they sell will be "non-core".

Northern Rock, by contrast, is a stand-alone bank with a nationwide footprint (although its main business is focused on the northeast), and has the capacity to expand rapidly as others streamline their operations. It is the real prize out of the series of sales that are to come.

The Government wants to see three new viable and competitive banking groups emerge from the detritus, to inject some life into an ossified market. The torpor of this market will remain if the Big Four of Barclays, Lloyds, RBS and HSBC are allowed to sit back on their laurels, as their bankers snooze until the shares that make up their bonus packages become convertible into cash.

Northern Rock should arguably go to an entirely new entrant to the market, such as Virgin or Tesco. Banco Santander has already consolidated three banks, in the form of Abbey, Alliance & Leicester and Bradford & Bingley. It would hardly achieve the Government's aim were it to get its hands on another.

National Australia Bank's case is better, but, given that it already has a platform, it should be given its chance to grow it through what is sold out of RBS or Lloyds.

- INDEPENDENT