Lloyds TSB demanded penalty-free loans of up to £30 billion over two years as part of its proposed deal to rescue Northern Rock, it emerged yesterday.

The Bank of England made clear yesterday that it had rejected the demands because it was “inappropriate” to help to fund a bid by one bank for another. Mervyn King, the Governor of the Bank, came in for a barrage of criticism from Adam Applegarth on Tuesday during the Northern Rock chief executive’s lengthy appearance before the Treasury Select Committee.

Mr Applegarth said that Mr King’s refusal to extend to a bidder, which Mr Applegarth described as a “big retail lender”, the emergency unlimited loan granted to Northern Rock by the Bank had scuppered the deal.

“It’s my view that, had the facility been granted to a major UK high street bank, that would have prevented a run,” Mr Applegarth told the committee.

The mystery bidder is thought to be Lloyds TSB, which is believed to have entered into takeover talks with Northern Rock at least twice in late August and early last month.

The Bank said yesterday that the bidder made an approach to Northern Rock a week before the run on the Tyneside mortgage bank. In a statement yesterday, it said: “On the weekend of September 8-9, the Tripartite Authorities [the Bank, the Treasury and the Financial Services Authority] were informed that a potential bidder wanted loans of up to £30 billion over one to two years, without a penalty rate of interest, as part of the deal.

The Bank charges 1 per cent above base rate, currently 5.75 per cent, for its standby loans facility and does not disclose the penal interest rates it charges emergency borrowers. To obtain emergency funding, Northern Rock was forced to supply the Bank, the Treasury and the FSA with a viable business plan.

“The authorities, including the Bank of England, recognised the advantages of a takeover,” the Bank said yesterday. It added: “They also agreed that in the circumstances it would be inappropriate to help finance a bid by one bank for another.”

The Bank’s move to defend its position casts fresh light on the dynamics surrounding the rescue bid for Rock. More than £2 billion was withdrawn from Northern Rock deposit accounts during a week-long run starting on September 14, before the Treasury intervened to guarantee the rights of depositors.

Lloyds TSB has never confirmed that it was the bank behind the failed takeover attempt. The Bank did not confirm its name and Lloyds TSB declined to comment.

During the run, the Bank of England said that it would allow a buyer for Northern Rock to make use of the already-agreed emergency funding but Mr Applegarth said that by this time, the virulence of the run had scared away bidders.

A number of groups last Friday submitted offers of interest for the stricken bank. Virgin Group has proposed that it take control through the purchase of a majority stake. It is understood that Virgin has yet to receive a formal response from Northern Rock, although executives from both companies have been in talks.

JC Flowers, the US private equity firm, is also believed to be interested in buying the bank but is not yet thought to have submitted plans for the shape of the takeover.

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