The Treasury and Financial Services Authority(FSA) are heading for a clash over a proposal to allow bidders for Northern Rock's "good" bank to take about £500m out of the lender.
The Treasury is keen to achieve a price of £1bn and is exploring the idea of allowing the successful bidder to liberate about half of it after the deal, sources told the Times.
But the FSA is understood to oppose such a substantial removal of capital and wants the new owner to maintain a large financial cushion.
Sir Richard Branson's Virgin Money and the American private equity firm JC Flowers are currently the only two bidders. Final bids are due in by the end of next month and the government wants a sale by the end of the year, the Times reports.
The Treasury has already cut the price tag for Northern Rock from £1.4bn and the government may accept even less. Sources told the paper the government would achieve a deal only if it allowed the buyer to claw back £500m or even more from the business.
An alternative would be for the Treasury to take out the capital before a deal is signed, so that it can show it is generating a return for taxpayers.
Meanwhile NBNK, the bidding shell backed by City institutions and led by Gary Hoffman, yesterday submitted a bid worth £1.5bn for the 632 branches put up for sale by Lloyds, according to the Times.
NBNK is also interested in Northern Rock but cannot bid until November 5 because Mr Hoffman, the bank's former chief executive, is banned from the process until that point.
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