Rival lenders vow to fight any unfair competition from Rock

City sceptical of Government promise to run bank 'at arm's length'; Fears of market distortion

Competitors of Northern Rock warned yesterday that they would not tolerate a revival of the stricken bank at the expense of their businesses.

Rival lenders want to see a clear plan for the mortgage lender as soon as possible. The Government has said the bank will be run as a commercial operation "at arm's length" to get it into shape to be sold back to the private sector.

Ron Sandler, the former Lloyd's of London chief who took over as executive chairman yesterday, said he intended to write mortgages and take deposits in the normal way to rebuild the bank. But other lenders questioned how this could be done without Northern Rock having an unfair advantage and distorting the market.

Adrian Coles, the director-general of the Building Societies Association, said: "We can't have Northern Rock plundering through the markets getting every scrap of deposits available to repay the Bank of England. That would be wrong. It must act, as much as it can, as if it does not have taxpayer support."

Banks and building societies were already fed up with Northern Rock after the mortgage lender went on an aggressive lending binge in the years running up to its near collapse. They argue that it wrote mortgages at wafer-thin margins to meet its volume targets, distorting the market so that new mortgage business became unprofitable.

Now rival lenders will be watching the nationalised bank closely to make sure it is not using its Government guarantees to woo new depositors and get wholesale funding. Many banks have been hit by the scarcity and expense of funds from the capital markets which they came to rely on to grow their businesses.

Mr Sandler said he would wait until he had got to grips with the business before he laid out his plans.

The Government has until 17 March to submit a proposal to the European Commission so that it can judge whether nationalising Northern Rock complies with its rules restricting state aid to companies. Banking sources want to know how the bank will tread the line between complying with the state aid rules and getting itself ready to be sold on in a few years.

An industry observer said: "If the Rock is going into run-off, that won't be an issue for the rest of the industry. If the Rock is going to aggressively joust for new business, that will be an issue."

Sources pointed out that the industry now faces two state-backed savings institutions – Northern Rock and National Savings – in a highly competitive market for savers. Lenders are battling to raise deposits to fund their businesses instead of relying on wholesale markets.

The Prime Minister and the Chancellor insisted that the bank would be run "at arm's length" by Mr Sandler and his team without interference. But some analysts believe the Government will not be able to resist influencing how the bank behaves in times of economic strain. "We expect some headline but very modest job losses, a less aggressive repossession strategy and possibly some politically driven lending," Numis analysts said in a note.

An industry source close to a rival mortgage lender said Northern Rock could "set the market" if it automatically passed on the full benefits of interest rate cuts to its customers. Banks are trying to shore up their margins in the face of higher funding costs.

Banking sources accept that the Government had to bring the Northern Rock affair to a conclusion and the sooner the better. Some even believe the five-month delay before nationalisation gave the industry breathing space so that the shock was minimised when it came.