The split will happen later this year
The nationalised Northern Rock bank is to be split in two later this year.
The bank's plan will see a new "Bankco" holding its savers money and carrying out new lending, and holding some of its existing mortgages.
The "Assetco" will hold the rest of the mortgages and will be responsible for repaying the outstanding £8.9bn of the government's loan to the bank.
Northern Rock was rescued from collapse in the autumn of 2007, and formally nationalised in early 2008.
The idea of a split was first outlined earlier this year as part of a changed government strategy for the bank, but has now been confirmed subject to European Union (EU) approval.
"We feel this is the best way of providing value for money to the taxpayer," said a spokeswoman.
The EU has been investigating the extent of the UK government's state aid for the bank.
Earlier this year Northern Rock said it would slow down its previous plan, which had been to raise money by redeeming its mortgage loans as fast as possible.
At the government's behest it has now agreed to start expanding its lending again, by an extra £14bn worth of mortgages in the next two years.
"It is too early to tell if Assetco will lend new mortgages" said the spokeswoman.
Total taxpayer support for the bank has amounted to £26.9bn, although most has now been repaid.
The plan is that the remaining amount will be repaid by the end of 2010.
The proposed split depends on EU approval under its rules governing state aid for businesses.
"We are still developing the plan and details still have to be worked out," the spokeswoman added.