Chancellor set to announce Northern Rock privatisation

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Media captionNorthern Rock, the bank whose collapse marked the start of the credit crisis more than three years ago, is to be returned to the private sector

The chancellor will announce tonight that the bank whose collapse marked the start of the great crash of 2007-8 is to be privatised.

Northern Rock is to be auctioned, with an expectation that the sale could raise around £1bn.

In his Mansion House address to bankers in the City of London, George Osborne will also announce that he has responded to pressure from the Treasury Select Committee and from the Independent Commission on Banking for the promotion of competition in the banking industry to be a primary duty of the new Financial Conduct Authority, which will take on the consumer protection functions of the Financial Services Authority.

His main theme however will be what he calls "the British dilemma", which is how to reform and make safe the banking industry, without undermining its ability to generate wealth for the UK.

Central to his solution, as I revealed last night, is his decision to force the giant universal banks - Barclays, Royal Bank of Scotland and HSBC - to insulate or ring-fence their retail activities from their more speculative investment banking, with the aim of reducing the potential cost to taxpayers and the economy of future banking crises.

He will reveal new statistics showing how important it is to minimise the potential of big banks to wreck the economy. Mr Osborne will say that in the year and a half since the end of the recession, the output of the UK's financial sector has continued to contract by 4%.

Or to put it another way, as he will, the economy would have grown at roughly its long-term trend rate since the recession, instead of limping along, if it hadn't been for the continued shrinkage in the banking and financial sector.

On the method for privatising the Rock, Mr Osborne has decided to offer the whole of the Rock for sale, rather than floating it on the stock market or responding to pressure from some MPs for it to be mutualised and turned into a building society.

He is following the recommendation of UK Financial Investments, which manages the Treasury's stakes in banks, and also of UKFI's adviser Deutsche Bank, of what is best for taxpayers.

That said, the Treasury believes that the Rock could become part of another building society, because it expects to receive bids from Yorkshire Building Society and from Coventry Building Society.

Other possible bidders include Sir Richard Branson's Virgin Money and NBNK, the company set up last year to buy banks - although both Virgin and NBNK are more interested in buying Verde, the much bigger banking business that Lloyds is being forced to sell.

The Treasury plans to move rapidly to a disposal, with the hope that the new owner could be known before the end of the year.

According to sources close to the chancellor, he opted for an outright sale because he was advised by UKFI and Deutsche that this would raise twice as much for taxpayers as a flotation or mutualisation.

However if Northern Rock were sold for around £1bn, that would represent a small loss for taxpayers on the £1.4bn injected into the bank in early 2010 by the Exchequer.

Even so, that does not mean taxpayers will end up losing money on the nationalisation of the Rock, because many of its assets are staying in the public sector following a reconstruction of the bank that took place 18 months ago.

What is being sold is a bank with more than 70 branches, retail deposits of £16.7bn and mortgage loans of £12.2bn.

Because it has lent so little relative to its deposits, and because its overheads are high, the Rock made a loss last year of £232m.

Any new owner would have to reorganise the Rock to enable it to generate significant profits, so it may well sell at a discount to the current £1.2bn value of its equity capital.

However £44bn of mortgage loans made by the Rock in the past will remain owned by the government, as part of a state-owned business called UK Asset Resolution.

This £44bn book of old Rock mortgages is profitable: last year it generated a profit of £400m before tax.

So even if there is a loss of a few hundred million pounds on the privatisation of the Rock, this is likely to be more than offset over the coming years by profits generated as Northern Rock's older mortgages, still in state hands, are repaid.

A Treasury source said it would take many years to know how big a profit, if any, taxpayers would eventually generate from their ownership of the Rock.

The chancellor hopes that the sale of Northern Rock will send a powerful signal that the banking industry is on a path back to more normal conditions, following the crisis of three years ago.

However it will be many months before he can start the much more important sales of taxpayers' 41% stake in Lloyds and 83% of Royal Bank of Scotland. And even when the Treasury starts to sell shares in these banks, it will take many years for all the shares to be sold.