Bradford & Bingley and Northern Rock, the two UK-based lenders that were the first to receive lifeline from the government, are on the verge of merging their so-called 'bad banks.' The European Commission is expected to clear way for B&B to merge its buy-to-let mortgage loans with Northern Rock Asset Management.

Under pressure from the Building Societies Association to remove some of the state benefits that Northern Rock still enjoys, the government is reported to have been devising plans to merge the two toxic banks for some time.

The appointment of Richard Pym, chairman of B&B, as chairman of Northern Rock Asset Management late last year was also seen as a precursor to the impending merger of the two firms.

Reportedly, following the successful completion of the legal and capital restructuring on 1 January 2010, Northern Rock has been split into Northern Rock plc (good bank) and Northern Rock Asset Management (bad bank). The good bank is expected to be sold back to the private sector later this year. However, the state will retain bad bank.

Bradford & Bingley (B&B), which was part-nationalised in September 2008 and was subsequently split into ‘good’and ‘bad’ businesses, sold its savings business and branch network to Santander, the Spanish banking major. B&B will probably have to sell its insurance business that provides home contents, motor and life assurance policies.