JC Flowers is expected to submit a firm proposal for Northern Rock in the next two to three weeks and believes that it is further ahead than the Branson consortium in the race for the stricken mortgage bank.

Sources close to the American investment group said that it was in the advanced stages of due diligence and had made progress pulling together the necessary finance ahead of a formal offer.

JC Flowers is stepping up efforts for Northern Rock as sources said that a consortium led by Sir Richard Branson’s Virgin Group was pushing ahead with its proposal and last night was set to meet representatives of Merrill Lynch and Citigroup, Northern Rock’s advisers.

Citigroup is ready to lend up to £10 billion in financing for Northern Rock and its potential acquirors. However, before that can happen, the bank needs to unstitch an agreement with the Bank of England for a limitless supply of credit guaranteed against its assets.

The sources said that Virgin Group had been inundated with offers of equity since its announcement on Friday, but the key question is how Sir Richard’s consortium would secure the necessary line of credit to keep Northern Rock afloat. One source said: “No one is concerned about their [Northern Rock’s] assets, but regulators will require more liquidity [in the event of a takeover].”

Jayne-Anne Gadhia, head of Virgin Money, promised to restore confidence in the bank and protect “the most possible jobs”. Speaking on Sky TV last night, she said: “We believe that we are the strongest proposal Northern Rock has.’’ Talks with Citigroup and Merrill over financing come as Matt Ridley, Northern Rock’s chairman, and Adam Applegarth, its chief executive, are set to face a grilling from MPs today at a Treasury Select Committee hearing.

Michael Fallon, the most senior Conservative member of the committee, said: “Obviously, there were gaps in the way the bank was supervised, but that does not excuse management from its primary responsibility to ensure that the bank was solvent and liquid. In that regard, it’s obvious they totally failed.”

Mr Fallon said that the pair would face tough questions over why, according to the Financial Services Authority, Northern Rock had been pursuing an “extreme” business model in the middle of an escalating global credit crisis.

Mark Todd, a Labour member of the committee, said: “I think one of the key questions will be the apparent confidence in their business model when just a week later they stepped off a precipice.’’ It also emerged last night that MPs had added two of the bank’s high-profile nonexecutive directors to its lineup. Sir Derek Wanless, the former NatWest chief, and Ian Gibson, the Rock’s senior nonexec, will face questions at today’s hearing.

Northern Rock shares were the FTSE 100’s biggest faller yesterday, closing down almost 21 per cent at 216.2p.

Lenders reject more mortgage applications

Failed mortgage applications in Britain have surged almost 60 per cent over the past six months, as banks and mortgage providers toughen their lending criteria in the wake of the credit crunch and a string of interest-rate rises, according to price comparison service MoneyExpert.com. A total of 738,000 home loan applications were rejected in the half year to October, as interest rates rose to a six-year high, from 4.75 per cent to 5.75 per cent. Sean Gardner, chief executive of MoneyExpert.com, said: “The financial environment is far more stringent than in the summer of last year and people need to be prepared for rejection.”

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