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The bank, which was nationalized in February, has reduced it's debt to the Bank of England by $18.37 billion but has no shareholders to turn to for replenishing capital "so it has to come from us", British Chancellor of the Exchequer Alistair Darling told the Times of London.

The deal must be approved by regulators in Brussels, but "the value of the additional equity will be reflected in the sale price for Northern Rock on return to the private sector", Darling said.

The debt-for-equity swap "will not change the government's net cash exposure to Northern Rock", the bank said in a statement.

Northern Rock lost $1.14 billion in the first half of the year, as many borrowers couldn't keep up with interest payments, the Times reported.

Bank Chairman Ron Sandler said the credit market remained in turmoil but he was "confident that the foundations have been well laid for recovery and return in due course to private ownership."

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