After failing to find a buyer for the whole of troubled lender Bradford & Bingley, the Treasury announced this morning that its mortgage and personal loan book as well as wholesale liabilities will be taken into public ownership, while the bank’s retail deposit arm along with its branch network will be sold to Abbey, a subsidiary of Spanish banking giant Santander.

A statement from the Treasury said that “Following recent turbulence in global financial markets, Bradford & Bingley has found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution.”

On September 16th credit rating agency Moody’s downgraded B&B; to BAA3, which is just one level above “junk” rating; the two other agencies, Fitch and Standard & Poor’s, followed shortly thereafter.

Following the downgrading and increasing rumours that the UK’s biggest buy-to-let mortgage lender was running into trouble, thousands of retail savers had withdrawn millions of pounds over the weekend as uncertainty grew over Bradford & Bingley’s future.

The Government had been prepared to look for a rescuer, but potential buyers such as Santander, HSBC and Barclays were only interested in the “good assets”, which include £22billion of retail deposits and B&B;’s network of 200 branches and 140 agency branches.

None of them were prepared to touch B&B;’s £40billion mortgage book, for obvious reasons; as Credit Suisse analyst Jonathan Pierce pointed out: “Bradford & Bingley’s biggest issue is asset quality. We doubt any major bank will want exposure to a £40billion mortgage portfolio with arrears almost double the industry average, and where over 40 per cent of loans will be in negative equity if house prices fall 30 per cent peak-to-trough, on our estimates.”

More than 80 per cent of Bradford & Bingley’s home loans are high-risk buy-to-let mortgages or self-cert mortgages, which are given to borrowers without any proof of income.

This might come to be a problem for the Government when trying to shrink the mortgage book. When taking over Northern Rock, borrowers were encouraged to remortgage with another lender in order to reduce mortgage lending by half.

However, with Bradford & Bingley, there is no such possibility as both the buy-to-let and the self-certified mortgage market has nearly shut down completely, with most lenders withdrawing their offers from the market. Borrowers will be left with little option other than to switch to the lender’s much higher standard variable rate.

One plan under consideration was to merge the nationalised B&B; with Northern Rock, but the Treasury’s Chief Secretary, Yvette Cooper, said this was of secondary importance and the priority was to ensure that depositors were adequately protected and the stability of the banking system preserved.

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