MINISTERS were yesterday urged to consider using Northern Rock as the base for a new “challenger bank” to spark a competition revolution in high street banking.

The Government-appointed Independent Commission on Banking (ICB) said the coalition should not rule out combining the Newcastle-based institution with hundreds of branches that Lloyds Banking Group (LBG) is required to sell to meet competition rules.

The news comes after UK Financial Investments (UKFI) – the agency holding taxpayers’ stakes in banks – told MPs that remutualisation was a “realistic” possibility for the Rock.

Officials also said Northern Rock could be sold to a new entrant to the banking market or merged with another smaller financial institution, but appeared to rule out a sale to one of the high street banking giants on competition grounds. In an interim report on the banking sector, the ICB said various ideas had been mooted for using the Government assets of Northern Rock to boost competition.

“In general, these assets are too small to make a very substantial difference in the national market on their own. However, the Government should have regard to competition considerations in its management and disposal of these assets,” it said.