The Treasury has told its investment banking advisers to examine the feasibility of selling Northern Rock, the nationalised lender, back to the City in the autumn, The Times has learnt.

A number of senior banking sources said that the Treasury was trying to ascertain whether it should float the state-controlled lender on the stock market, sell the bank to another financial group or remutualise it.

The Treasury’s existing external advisers are already considering a range of options to discover which method would lock in the biggest return for the taxpayer on the disposal of the bailed-out bank.

The Government is eager to sell Northern Rock to the private sector at a profit to prove to voters that Gordon Brown has overcome the financial crisis that brought the British banking system within hours of collapse.

However, Treasury insiders sought last night to dampen hopes that Northern Rock would be sold before the next general election. Ministers are understood to be cautious of selling the bank in the short term and want to ensure the best return.

Treasury sources insisted last night that the Government was in no hurry to sell Northern Rock and was keen to leverage its control of the bank to extract substantial commitments to boost lending to the mortgage market.

But the disposal of Northern Rock by the autumn would represent a huge coup for a Government that has just won a reprieve from the crisis engulfing its leadership. Gordon Brown must set out his vision for the election at the Labour Party conference in late September.

The Government is understood to favour the sale of the lender rather than a flotation because it would be speedier, but the complex process is expected to take several months to complete. Lenders such as Lloyds Banking Group and Royal Bank of Scotland would not be allowed to bid for Northern Rock because of their existing share of the UK mortgage market. Although Northern Rock has about 50 branches, its only substantial asset is its £100 billion mortgage lending book. Complicating any sale of the mortgage book are issues such as whether to include all of Northern Rock’s toxic loans or to split them out, keeping the worst-quality assets under state control.

The Government will also have to find a buyer that would be prepared to replace the £3 billion of capital that it has said it will inject into Northern Rock to improve its capital. That sum would be on top of any potential sale price.

The Government is waiting for a ruling from the European Commission on state aid issues. In the next couple of weeks the Commission is expected to give the UK the green light over the £3 billion capital injection and over the bank’s plan to increase new lending significantly. However, until the Commission’s verdict is made public, the Government would not able to press ahead with its plans for a sale.

Two years ago this autumn Northern Rock turned to the Bank of England to beg for a liquidity support facility, which triggered a run on the lender. By February last year the bank was taken into state ownership after two attempts to acquire it failed.

The nationalised bank cut costs by reducing staff and has since been repaying the Government. By March this year Northern Rock was well ahead of target, owing a net balance of £8.9 billion on a loan that stood at £26.9 billion at the end of 2007.

— Northern Rock shareholders gathered in London outside BDO Stoy Hayward, the accountancy firm chosen to carry out a valuation of the nationalised lender, to highlight their battle for fair compensation. The investors assert that they have been short-changed by the Government’s compensation scheme after the nationalisation in February 2008. Today the Court of Appeal will carry out a judicial review of the fairness of the compensation terms set by the Government.

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