The European Commission will today approve the Government’s plan to split off the viable part of Northern Rock and sell it. Neelie Kroes, the Competition Commissioner, will allow the injection of £3 billion of taxpayers’ money into the part of the bank that contains depositors, branches and some “good” loans.

Some higher-quality home loans will be retained in the rump “bad bank” and remain in state hands. The “good” part of Rock will be handed to UK Financial Investments, the Treasury-controlled unit that owns bank stakes, by the turn of the year with instructions to sell it as soon as possible with the proviso that taxpayers get value for money. That raises the possibility that a deal could go through before the election.

The Government has not ruled out turning Northern Rock into a building society owned by its customers, although the overwhelming preference, according to people within the Treasury, is for a sale. Alistair Darling, the Chancellor, wants a new entrant into the market rather than the remutualisation of Northern Rock, which will report third-quarter results next week.

The big five high street banks will be forbidden from bidding in an attempt to inject fresh competition into the sector. With Royal Bank of Scotland and Lloyds Banking Group both expected to be forced to disgorge hundreds of branches as the price of EC approval, three new entrants to the retail banking industry could be in place within five years, said government sources.

RBS is working on plans to resurrect its Williams & Glyn’s brand, which could be split off with about 300 branches in England and Wales. Lloyds may be forced to sell Lloyds TSB Scotland, which has a 200 branches.

Virgin and Tesco are seen as possible buyers. Two weeks ago Virgin applied to the Financial Services Authority for a banking licence. Tesco has also said that it wants to build on the success of Tesco Personal Finance. It could be interested in buying up books of current account customers that Brussels may force Lloyds to divest.

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