Treasury and FSA set to clash over Northern Rock bid

The Treasury and the FSA are ready to clash over a proposal to allow bidders for Northern Rock’s “good” bank to take about £500m out of the lender.

According to the Times, the Treasury is exploring the route in a bid to ensure that bidders actually reach the £1bn asking price for the lender, however the FSA is strongly against the move as it wants Northern Rock to maintain a large financial cushion should another problem hit the markets in the next few years.

Virgin Money and private equity firm JC Flowers are the only bidders for the firm with a deadline for bids set for the end of next month with a view to completing a sale by the end of the year.

The price tag for the lender has already been cut from £1.4bn and it is believed the government will accept even less for the bank, which is currently making a loss. Sources say the government would only achieve a deal if the buyer was able to recoup £500m from the business.

Other options being touted are that the Treasury removes the £500m of assets before the deal is signed to demonstrate Northern Rock can still generate a return for taxpayers. However, if that were to happen the price would be reduced drastically.

Northern Rock’s “good” bank was forced to hold a much higher level of capital than other lenders when it was split from its “bad” bank, which holds toxic assets, last year.