The move – unveiled in the Budget – will maximise value for taxpayers and create a solid platform for the management of both firms’ mortgage books.
Under the arrangement, both lenders will remain as separate legal entities and each will have its own balance sheet liabilities and support arrangements.
There is no full timetable for the merger and the change will not affect customers.
Northern Rock was split into a “good” and “bad” bank at the start of the year. The “bad bank”, NRAM holds about £19bn in savings and £10bn of mortgages. B&B went through a similar split in 2008, with its savings business and branch network sold to Santander, while its loan book was nationalised.
Gary Hoffman, chief executive of NRAM, said the merger was the next step for NRAM and would help both banks deliver maximum value for taxpayers.
Mark Graves, managing director of Linear Financial Services, said it was the best possible solution which the Government could have chosen.
He added: “It focuses one management style on two separate problems and it will enable the Government to put the right people is charge of looking after existing clients. It also creates the best possible chance for taxpayers to get a return.”