THE world’s biggest bank, Citi, is planning to bail out Northern Rock by throwing a £10 billion lifeline to the stricken mortgage group.

The deal is expected to be agreed within a week. It will send a powerful signal that Britain’s fifth-largest mortgage lender is on a more stable footing and able to raise funds in the wholesale markets.

Since September 14 Northern Rock has had to borrow from the Bank of England under an emergency deal at a penal rate of around 7%. Despite attempts to stabilise the troubled bank, no commercial lenders have been prepared to deal with it.

The mortgage bank was hit by a stampede of savers scrambling to withdraw funds last month before the Treasury guaranteed deposits held by the group. In the past three weeks, Northern Rock has been forced to borrow £10.9 billion from the Bank of England.

Until now Citigroup was seen as a possible provider of funds to support a potential bidder for the Newcastle-based lender. And last week the investment bank was appointed, alongside Merrill Lynch, to advise Northern Rock on a sale.

But Citigroup is also aiming to offer between £5 billion and £10 billion directly to Northern Rock to ease its funding crisis.

Exact terms of the loan are still being hammered out, but the funding will be linked to the three-month inter-bank, or Libor, lending rate. This should cut the cost of raising funds for Northern Rock.

Last week the bank scrapped about two-thirds of its products because they are unprofitable at current funding levels.

In recent weeks the Libor rate has fallen from around 6.9% to close on Friday at 6.24%. Northern Rock needs to refinance an enormous £14 billion in loans in the second half of this year and up to £30 billion over the next 12 months, according to some analysts.

The loan from Citigroup could boost the hopes of Northern Rock’s management, led by chief executive Adam Applegarth, to keep the bank running as an independent company.

Applegarth has admitted that Northern Rock, which was plunged into crisis when the wholesale markets – on which it relied for 75% of its funding – froze, will have to be a lower-growth business in the future.

Although the Citigroup lifeline will boost hopes that Northern Rock can remain independent, analysts say this is unlikely. JC Flowers, the private-equity group run by former Goldman Sachs banker Christopher Flowers, is pressing ahead with plans to bid for Northern Rock.

Flowers, a billionaire financier, wants to keep Northern Rock intact and has approached senior British bankers and several former government figures about running the bank.

These are understood to include Philip Williamson, the former chief executive of Nationwide building society. Williamson is thought to have turned down the offer.

Rival bidders such as hedge fund Cerberus are interested in parts of Northern Rock’s £105 billion mortgage book. Lloyds TSB held detailed talks about buying Northern Rock before the Bank of England set up the emergency funding.

Any bid would be complicated to fund. A buyer would also insist on the Bank of England extending the existing facility. However, it is not clear how long the Bank is prepared to keep lending.

Though the government and the regulators want to end the uncertainty, bankers say that a deal could be weeks away.

It has also emerged that a break-up of the bank would lead to substantial losses for holders of £1 billion of Northern Rock’s junior bonds. These are not covered under a government guarantee protecting senior creditors.

Bankers say this guarantee could be worth up to £20 billion and was put in place when the government stepped in to protect savers’ money.

Holders of the banks tier-two debt have set up a special committee to protect their interests and appointed investment bank Houlihan Lokey Howard & Zukin as advisers.

Shareholders are worried about a fire sale. Analysts have estimated that the maximum any bidder could pay would be 190p per share, valuing the bank at around £800m. In February, Northern Rock was valued at more than £5 billion.

Last week insiders said that both JC Flowers and Cerberus are looking for cash injections from investors, including sovereign wealth funds. Without more funds, there are concerns that Northern Rock’s debt could not be syndicated.

Executives from JC Flowers, including Ravi Sinha, the head of its European operations, met Northern Rock management last week and are expected to hold further talks in the next few days.

Christopher Flowers spent most of last week in Europe meeting potential backers. Cerberus and two other potential serious bidders have also met Northern Rock management.

Blackstone, the giant American private-equity firm, and Apax, its British rival, are also understood to be interested in the bank.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive