2.13 Before approaching the Bank of England for emergency support, Northern Rock had been searching for a private sector solution. Merrill Lynch was engaged by Northern Rock to conduct an initial search for a buyer of the business by identifying and contacting UK banks least affected by the closure of the wholesale-funding markets. The Financial Services Authority, as Northern Rock's regulator, had also been involved. On 24 August 2007, the Treasury was informed by the Authority that three banks had expressed an interest in bidding.
2.14 By 6 September 2007, however, two of the three potential bidders had dropped out. The Authority told us that the major UK banks saw little value in Northern Rock. Much of the value in a takeover in the retail banking sector depended on the integration and rationalisation of existing branch networks to eliminate overlaps. As Northern Rock operated a relatively small branch network, it did not offer significant opportunities to consolidate branches and make efficiency savings.
2.15 Shortly afterwards, the remaining potential bidder, Lloyds TSB, stated that it was prepared to consider buying the company if the Bank of England would agree to provide a stand-by facility of between £20 billion and £30 billion over two years at the Bank's official interest rate. Following discussions amongst the Tripartite Authorities, it was decided that the request should be refused on the grounds that a loan on such favourable terms over a long period of time would constitute state aid to a single, liquid party and give it an unfair competitive advantage, unless similar terms were offered to other possible bidders. Lloyds TSB accepted the decision, but also stated that it remained interested in acquiring the company.
2.16 The Tripartite Authorities then agreed that the existing emergency support to Northern Rock could be made available, if needed, to prospective bidders to enable them to purchase the company. Further discussions were held with Lloyds TSB on the size and length of time over which the support would be available. On 17 September 2007, following the initial run on retail deposits, Lloyds TSB assessed the damage to the company's franchise and pulled out of further discussions. It considered that Northern Rock was not a going concern and that an acquisition with the aim of winding the company down would not provide a sufficient return for Lloyds TSB.