AT LEAST a dozen of the biggest financial institutions in Britain and Europe have snubbed pleas to rescue ailing mortgage lender Northern Rock.

The Bank of England, the Financial Services Authority (FSA) and Northern Rock’s corporate adviser, Merrill Lynch, have spent the past two weeks trying to find a white knight to take control of the former building society.

But rival banks say a rescue is too risky and those who have seen Northern Rock’s books say it would take weeks to examine its figures and find a way to plug the hole in its finances.

They also say it would require too much capital to take on the £100 billion-plus mortgage book. Some analysts believe its future funding requirements could be as much as £20 billion next year to refinance existing mortgages and raise new funds. The sum will be lower if it slashes its lending.

British banks, including HSBC, Royal Bank of Scotland, Barclays and Lloyds TSB have now walked away from a rescue. Continental banks, including Santander and Crédit Agricole, have turned down a request to take part in a takeover, and the two Irish banks, Anglo Irish and Allied Irish, have also spurned overtures to join a rescue deal.

One banker said: “We’ve tried everything, everyone and every tactic in the book to make Northern Rock look its most tantalising, but the answer has been no. In fact, I’d go further than that and say that we’ve just had raspberries blown at us instead.”

Another said: “It’s a big business – and there aren’t many people looking to take on £100 billion on their books at the moment. Several of the obvious big players are tied up with the battle for ABN Amro – and that’s before you even consider the credit crunch. The obvious tactic is to sit tight and wait to see how things progress before making a move.”

Bankers say Northern Rock has no option but to try to go it alone. Adam Applegarth, the bank’s chief executive who received £1.3m in pay and bonuses last year, is now having to undertake a strategic review. The Bank of England has provided the Newcastle-based institution with a lifeline, giving depositors cast-iron promises that their money is safe.

As part of his review, Applegarth will be forced to answer tough questions from the FSA and the Bank of England.

This review means Northern Rock will have to scale back its aggressive lending tactics and will no longer be able to offer the attractive deals that won it nearly a fifth of new mortgage business in the early part of this year.

Applegarth has already admitted the bank’s days of fast growth are over and this could result in at least 10% of its 6,000 workforce losing their jobs. It is hoped this will be achieved through voluntary redundancies.

However, in an attempt to bolster the share price, which has fallen 85% from its peak earlier this year, he plans to press ahead and pay a £59m dividend, even though the bank is not legally obliged to make the payment. Northern Rock is still on course to make pre-exceptional profits of £500m this year.

Northern Rock last week became the most shorted stock in the UK market with traders staking nearly £220m in the belief that the share price is set to fall even further. Almost 25% of the embattled bank’s total market capitalisation is currently being borrowed.

Meanwhile, the Bank of England has insisted it will not shift its tactics in the money market again, following City accusations of a u-turn last week when it agreed to provide £10 billion of three-month liquidity to the markets against the collateral of bank mortgages.

Officials said the terms of the Bank’s assistance at a percentage point above the 5.75% Bank rate, were designed to be penal. They insisted that the provision of liquidity did not amount to a bail-out of banks for irresponsible decisions.

Some City analysts have been speculating that the Bank will lower the rate at which it offers liquidity to the markets if the crisis intensifies. Under the terms of the Bank’s three-month loans to the market, the first of four auctions will take place on Wednesday. The Bank will accept only mortgages with a loan-to-value of 95% or less as collateral.

Money-market participants are debating whether to take up the loans. One fear is that the names of those who apply will leak out, creating a stigma.

Treasury officials have said they will review every aspect of the regulatory system affecting banks, following King’s complaint last week that he was hamstrung in his ability to prevent the Northern Rock crisis developing. But European Commission officials hit back angrily at King’s claim that EU legislation had hampered him. Officials insisted that the market-abuse directive did not prevent central banks acting covertly to assist banks in difficulty.

One certain reform will be to the Financial Services Compensation Scheme, currently restricted to the first £35,000 of people’s savings. In an interview yesterday Alistair Darling, the chancellor, hinted strongly that he favoured a US-style deposit-protection scheme – funded by the industry - to protect savers’ money up to £100,000.

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