JC Flowers’ surprise exit also hints that the competition from Virgin Money is far too great. However, the equity group said it did not see how it could meet its own financial hurdle rates while satisfying the government and shareholders.

The equity group had proposed repaying £15 billion of Bank of England funding but would have only given shareholders a nominal amount.

Olivant, the private equity group led by Luqman Arnold, a former Abbey National chief executive and private equity group Cerberus are still in the running with Virgin Money to take control of the mortgage lender. 

The rate of savings withdrawn form the bank has slowed in the past fortnight since the Virgin consortium was named as the preferred bidder.

If Virgin should emerge successful, it could see the demise of the Northern Rock brand after being tainted by recent scandal.

Northern Rock’s marketing team, currently led by marketing director Andy Kuipers who has announced he will leave the company in January, could also be placed under threat as a result of the merger.

It is understood that Virgin’s offer includes an instant payment of £11 billion of the £25 billion Northern Rock owes the Bank of England, as well as injecting £1 billion in equity for a controlling stake.

Before the deal completes, it has to be approved by the Treasury Bank of England and the Financial Services Authority.

Should the acquisition be successful, Virgin boss Jayne-Anne Gadhia will takeover the running of Northern Rock.

Northern Rock was forced to seek emergency funding from the Bank of England in September after running into difficulties due to turbulence in the world credit markets.

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