Process to sell Northern Rock will begin this year

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A buyer for Northern Rock, the bank nationalised in 2008, will be found by the end of the year, the Chancellor, George Osborne, announced last night.

The move marks the start of the Government's "exit strategy" after buying bank shares during the financial crisis. But a gradual sell-off of stakes in Lloyds Banking Group and Royal Bank of Scotland will not start until next year at the earliest.

Mr Osborne has ruled out remutualising Northern Rock, which would bring no revenue for taxpayers. He will sell it to a single buyer rather than float it. Possible bidders include the Coventry and Yorkshire building societies, Sir Richard Branson's Virgin Money, Tesco Bank and the investment groups NBNK and Olivant.

Northern Rock's sale is expected to raise about £1bn – less than the £1.4bn injected by the Government. It has been split into a "good bank", containing customers' savings and about 70 branches, and a "bad bank", holding the more toxic loans, which will be retained.

In his annual Mansion House speech, Mr Osborne said: "Images of the queues outside Northern Rock branches were a symbol of all that went wrong, and its chaotic collapse did great damage to Britain's international reputation. Its return now to the private sector would help to rebuild that reputation. It would be a sign of confidence and could increase competition in high street banking."

Striking a cautiously optimistic note on the economy, Mr Osborne said: "Stability has returned. Britain is on the mend. But it is taking time."

He argued that "external shocks" such as the oil price hike, Japanese earthquake and eurozone crisis had made the recovery more difficult.

"Across the world, choppy economic waters have become choppier still... Even without these substantial headwinds, the journey the British economy has to travel would be a hard one."

A banking system which "fuelled the boom" was now "slowing the recovery from the bust," he said. Since the recession ended, the economy has grown by 2.5 per cent, but the financial sector has shrunk by 4 per cent.

He highlighted the "British dilemma" of how to have a successful financial services industry without it posing a risk to the economy.

"We want Britain to be the home of some of the world's leading banks, but those banks cannot be underwritten by the British taxpayer," he said. But he admitted: "We cannot hope to abolish boom and bust."

Labour MP Gareth Thomas, who chairs the Co-operative Party, said the Government had missed a once-in-a-lifetime opportunity to return Northern Rock to the mutual sector. He insisted such a move could secure full value for money for taxpayers. “Unless the Government takes steps to re-build the mutual sector that was devastated under the Thatcher Government, it will continue to make the same mistakes that got us into the current financial crisis,” he said.

In a lecture tonight, Ed Balls, the shadow Chancellor, will highlight the "pain" caused by the Government's decision to cut spending "too far, too fast".

The shadow Chancellor will insist he has never shirked "tough decisions", saying: "I am making the case for a slower and more balanced approach not because I am a deficit denier, but because it is the tough – but cautious and credible – thing to do."