The European Commission is pushing for Northern Rock, the nationalised mortgage lender, to downsize more aggressively, potentially leading to thousands more job cuts.

Regulators in Brussels have disclosed for the first time their three main criticisms of the Government’s rescue plan for Northern Rock, once the UK’s fifth-largest mortgage bank. The key finding is that the £27 billion government loan given to bail out the bank could be repaid before the target date of 2010 if its market share were reduced more drastically than Ron Sandler, the chief executive, plans at present. That would almost certainly lead to a permanent contraction in the size of Northern Rock, increasing the likelihood of job losses and reducing the amount that a private-sector buyer might pay for it.

Mr Sandler expects to cut Northern Rock’s workforce by one third, or about 2,000 jobs, and further losses would be politically sensitive in the North East, traditionally a stronghold for the Government.

The European Commission’s report also implies that the Government has extended the £27 billion commitment for longer than necessary. It said: “It seems that a more rapid and more profound downsizing could be implemented, allowing thereby a more rapid redemption of the State facilities.”

Mr Sandler has committed to reducing Northern Rock’s balance sheet of £107 billion in 2007 to between £48 billion and £55 billion by the end of 2011. That will be done by reducing its market share of gross new mortgage lending from 8 per cent last year to about 1.5 per cent to 2.5 per cent for the next four years. Its market share in savings will be limited to 1.5 per cent.

The Commission’s report has found that further market share reductions may be necessary to prevent Northern Rock having an unfair advantage over other banks. As a nationalised institution, Northern Rock can offer products that come with a government guarantee. The report said: “The Commission doubts whether the size and duration of this downsizing are sufficient to avoid undue distortions of competition.” The objections to the bailout scheme, which were presented by the Government to Brussels on March 17, are set out in a statement that the European Commission published yesterday.

The Commission has decided to initiate an in-depth investigation into the restructuring operation and has given interested parties, such as Northern Rock’s competitors, and other governments until July 3 to comment.

A Treasury spokesman said: “The Commission’s interests are very much aligned with our own objectives of maintaining financial stability and protecting taxpayers and consumers.” Northern Rock declined to comment.

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