'Bad banks' to merge under new holding company

The loan books of the two will be brought under one holding company with a single management team, UK Financial Investments (UKFI), the body formed to manage the government's stakes in bailed-out banks, said yesterday.

Both will keep their names from a customer perspective but will fall under a new holding company, the name of which is yet to be decided, a spokeswoman for UKFI confirmed.

The company's mortgage books will be run off and the holding company wound down as customers repay their home loans, she said.

Northern Rock was split in two at the start of this year, separated into a "good bank", with about 19 billion in savings and 10bn of mortgages, and a "bad bank" – renamed Northern Rock Asset Management – which has been left with the majority of the lender's loan book.

B&B went through a similar split at the time of its rescue, under which the savings business and branch network were sold on to Santander, the Spanish owner of Abbey, while its troubled loan book was nationalised.

Keith Morgan, head of wholly-owned investments at UKFI, said: "We believe that bringing these businesses together under a single holding company with a common management team is the natural outcome and the right solution to maximise value for the taxpayer. Northern Rock Asset Management and B&B are now similar companies and operating under this new structure will help deliver efficient management of both companies' closed mortgage books."

Each will remain separate legal entities under the new holding company, with individual balance sheets and government support arrangements.

The integration process will be "extensive" and the timescale has yet to be confirmed, UKFI added.

The news came as Chancellor Alistair Darling said the government would sell its shares in Royal Bank of Scotland, Lloyds Banking Group and Northern Rock "in a way that maximises value for the taxpayer and recoups the money we invested".

UKFI, set up in November 2008, was unable to put a figure on cost-savings from the merger.

There will be efficiencies in a reduced headcount, though it is hoped that job losses will be kept to a minimum. Northern Rock employs about 4,500 people across both parts of the bank, while B&B has nearly 1,000 staff.

The tie-up is also expected to help cut the costs of suppliers and IT systems.

Gary Hoffman, chief executive of Northern Rock Asset Management, said it was "the next step on the journey". He added: "We are pleased to have reached agreement with UKFI and Bradford & Bingley as to how we can move forward together, to deliver maximum value for the taxpayer."

Further details on the merger are expected within the first half of this year.