Building societies have complained to the European Commission that Northern Rock’s proposed restructuring plans would create an uneven playing field in the mortgage market.
Instead, the the Building Societies Association (BSA), which represents mutuals, says Northern Rock should be turned into a bank for first-time buyers and people with small deposits.
Back in April, reports emerged that a sales plan had been drawn up by advisers at Credit Suisse that would see Northern Rock back in private hands by Christmas this year. It had been suggested that the nationalised bank would siphon off its bad mortgage debts into a 'bad bank' and leave behind a 'good bank' - called BankCo - with secure assets thought to be worth up to £2 billion.
But the BSA says such plans would give it an unfair advantage in the lending stakes. It argues that BankCo would have a very strong position in the mortgage market, because its balance sheet would be relatively free of unpaid or badly performing loans.
As a result, it would be able to lend freely, without having to absorb losses from any borrowers that default on their mortgages, giving it an unfair advantage over its competitors.
The European Commission is currently studying details of the plans to restructure Northern Rock, to ensure it does not breach European state aid rules, and a verdict is expected in the autumn.
The BSA also wants Northern Rock to pay the government an annual premium in order to prevent a distortion of the mortgage market, should BankCo see the light of day.
As part of its evidence to the European Commission, the BSA suggests that BankCo should be forced to substantially operate in areas of the mortgage market where lending has become scarcer. This could include people who don't have large deposits to put down and first-time buyers.