Shares in Northern Rock, the beleaguered UK mortgage lender, rose 6.8 per cent in early trading as investors reacted positively to a rescue proposal by Luqman Arnold, the banking expert and City stalwart.

Olivant, the fund set up in 2006 by Mr Arnold and Alan Morgan, a partner at McKinsey, the US consultancy group, issued a statement today, confirming it is preparing a proposal for Northern Rock. Virgin Group, JC Flowers and Cerberus have all thrown their hat into the ring for Northern Rock.

The bank's advisers have set a deadline of this Friday for interested parties to submit their bids.

Olivant's proposal will involve Mr Arnold working alongside the current management, lead by chief executive Adam Applegarth and new chairman, Bryan Sanderson, as opposed to a sale or a break-up.

Northern Rock's shares rose 9.9p to 154.9p, to value the bank at £652.4 million.

In a statement, Olivant said: "The proposal would involve the immediate introduction into Northern Rock of a core team of Olivant's experienced principals, led by its chairman, Luqman Arnold, to work intensively alongside its existing Board and management, together with a subscription of a minority stake in Northern Rock, intended to ensure Olivant's alignment with the Board and shareholders."

It added: "Olivant is not proposing an offer for the shares of Northern Rock."

Mr Arnold has had a long career in the British banking industry, including acting as chief executive at Abbey National, which he attempted to revive but sold to Spain's Banco Santander

Mr Arnold, who is being advised by Ken Costa, the Lazard banker, is thought to have won the support of several key Northern Rock shareholders and chairman Mr Sanderson is also thought to view the proposals favourably.

The principle underlying the plan is that there is nothing fundamentally wrong with Northern Rock’s business, aside from the fact that the bank fell victim to a systemic liquidity crunch.

The plan is “all about restoring operational and financial confidence” in the business and is not believed to include any remuneration or fee for Mr Arnold’s group. The group's rewards would come from a recovery in Northern Rock’s share price.

Mr Arnold is believed to have discussed the proposal with the Bank of England, the FSA and other regulators.

At UBS, Mr Arnold helped to deal with the aftermath of the notorious Long Term Capital Management debacle in 1998, in which the bank lost more than $730 million.

His handling of that crisis as chief operating officer at Warburg Dillon Read, later renamed UBS Warburg, set him up for a subsequent ascent to the post of group chief financial officer and later president of the executive board. His tenure at the top was short-lived, though, as he was toppled later by Peter Wuffli.

In Britain, Mr Arnold is best known for helping Abbey to regroup after it slipped into the red five years ago. He helped to stabilise the company, although he did not get far in coming up with a new growth strategy before it was bought by Banco Santander.

A spokeswoman for Northern Rock said: “There is a formal process and all participants are invited and encouraged to make their bids.”

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