Oct. 28 (Bloomberg) -- The U.K. government will today win approval from the European Commission to divide Northern Rock Plc into two parts, transferring potentially toxic assets into a new entity, a person familiar with the decision said.

The decision will take Prime Minister Gordon Brown’s administration a step closer to selling the first bank nationalized after the credit crisis that roiled financial markets in 2007, said the person, who asked not to be named before the formal announcement in Brussels today.

European governments have pledged $5.3 trillion of aid to support lenders over the last two years during the worst financial crisis in seven decades, according to the European Union. The Treasury has said it may sell the Northern Rock’s sound assets including mortgages and retail deposits once the bank recovers from suffering the first run on a British institution in more than a century.

“We expect that once we’ve completed the restructuring of the banks the tax payer will make money,” Brown told lawmakers in the House of Commons on Oct. 21. “We’re determined to make money out of this.”

Ministers may sell the assets to new institutions looking to get a foothold in the U.K., potentially creating three new banks in the next five years. Brown has said he wants to spur competition among financial services to keep a lid on fees.

“The important thing is that we increase competition in the market,” Treasury Select Committee Chairman John McFall told the British Broadcasting Corp.’s Today program. “There must be channels for small and medium-sized companies to get credit.”

Bank of England Loan

Northern Rock, which is repaying the Bank of England extended as part of a bailout when money markets froze two years ago, asked the European Commission, the EU executive, to approve the plan to divide into two in June. The units may then be sold to investors together or separately, the bank’s Chief Executive Officer Gary Hoffman said in August.

Jule Wilson, a spokeswoman for Northern Rock, declined to comment. Jonathan Todd, a spokesman for the commission, declined to comment.

A possible buyer for the assets is Virgin Money, the consumer-finance part of Richard Branson’sVirgin Group Ltd. Virgin Money applied to the Financial Services Authority for a banking license at the beginning of this month, stoking speculation it may be planning a bid. Branson tried to buy Northern Rock before the Treasury seized it in February 2008.

ING Break-up

The EU is reviewing government bailouts across Europe to ensure state aid doesn’t give some banks an unfair advantage. ING Groep NV plans to raise 7.5 billion euros ($12.3 billion) in a rights offering and sell its insurance operations to win consent for a taxpayer-funded bailout, it said this week.

The EU forced Commerzbank AG in May to sell assets, and has indicated that Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc may be forced to sell assets and branches. RBS fell 8 percent and Lloyds 6 percent yesterday on concern that the banks will be forced to dispose of more assets than previously forecast.

Today’s decision will allow U.K. Financial Investments Ltd., the unit of the Treasury that controls Northern Rock, to begin exploring the possible options for a future sale. Ministers haven’t said when they’ll sell the stakes they hold in banks, saying only that the government aims to make a profit.

APS Talks

The Treasury is also talking with Lloyds and RBS about their participation in the government’s Asset Protection Scheme. Lloyds has said it wants to avoid the insurance program for riskier assets and the more than 15 billion pounds in fees it would cost.

Northern Rock’s restructuring must not be allowed to distort competition in the U.K. mortgage and saving markets, Adrian Cole, director-general of the Building Societies Association, told Bloomberg Television in an interview.

“It’s important that an institution that’s had taxpayer support over the last two years doesn’t compete unfairly with the private sector institutions that have struggled through the recession without the support of the government,” Coles said. “It would be quite unfair if Northern Rock comes back to the market squeaky clean, taking all the best-quality business.”

Northern Rock, which offered a 125 percent mortgage called “Together” at the peak of the U.K. property market, required an emergency loan from the Bank of England to prevent it succumbing to a funding shortage in October 2007.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Reed Landberg in London at landberg@bloomberg.net;

Last Updated: October 28, 2009 05:37 EDT