Plans for Northern Rock to split into a 'good' and a 'bad' bank

Northern Rock, Britain's state-owned mortgage bank, yesterday paved the way for a pre-election sell-off, informing people with risky mortgages that they would become customers of a "bad bank", to be called Northern Rock Asset Management.

The company said its "good bank", which ministers hope to fatten up for a pre-election sell-off, will continue to be called "Northern Rock plc", holding savings and some mortgages and selling new financial products.

European regulators are scrutinising the plans for the split, which the bank said were "progressing well". The Government hopes the split will be completed by the end of the year, but the EU could yet blow the plans out of the water if it decides that they violate laws banning state aid to industry.

It is hoped that the "good bank" will be seen as an attractive asset to buyers, and the company recently sought to further sweeten the pill by slashing its mortgage rates in a bid to attract new customers.

In a letter to customers the bank said it would write to them to tell them which part of the business would hold their mortgages ahead of the split.

"All our customers are very important to us and we aim to make this a seamless process for you... Thank you for your continued support," it said in the communication.

The near collapse of the former building society, based in the North East, came to define the credit crunch. Thanks to an ill-advised leak, the fact that the company had called on emergency funds from the Treasury was splashed across the BBC's "News at Ten", resulting in customers queueing up outside branches the next day to withdraw their cash. Nationalisation swiftly followed and the bank is now run by former BarclayCard boss Gary Hoffman. A spokesman for the company confirmed the new trading names for the two companies after the split but insisted that "no decision has been made" on Mr Hoffman's future.

He may run one or even both of the businesses before a sell-off, the spokesman said. Such a move would be politically expedient for the Government, which would be able to show some return on the £1.2 trillion of tax payers' money it has spent on bailing out Britain's banking system.

At the weekend it emerged that ministers are planning a sell-off of state assets to raise funds to plug the yawning hole in Britain's public finances, largely created by the bailout and the recession that was created by the banking crisis.

The Government also holds 43 per cent of Lloyds and 70 per cent of Royal Bank of Scotland, stakes which are set to rise if and when they enter the state insurance scheme to protect them against losses on nearly £600 billion of toxic assets. UK Financial Investments, which overseas the stakes, has said a sell-off of them would take some time.