Bradford & Bingley and Northern Rock were both bailed out by the UK government after running into trouble during the financial crisis (Reuters)

Britain's 'bad bank', set up by the government to unwind the toxic assets of Bradford & Bingley and Northern Rock, paid £3.8bn out to taxpayers in the first nine months of 2013.

Both institutions ran into trouble because of the financial crisis and the government stepped in to fully nationalise Northern Rock and part-nationalise Bradford & Bingley. UK Asset Resolution (UKAR) was set up in October 2010 by the government to manage the firms' mortgage assets which had turned, or risked turning, bad.

Richard Banks, UKAR chief executive, said his organisation had made good progress in the third quarter. In the whole of 2012, UKAR paid back £4bn to the UK government.

"It is also pleasing to see the continued reduction in arrears due to the dedication and professionalism of colleagues proactively working with our customers to help them achieve the right outcomes," said Banks.

In the third quarter, UKAR reported an underlying profit before tax of £327.4m, taking the nine month total to £856.2m.

Mortgage cases three or more months in arrears, including those in possession, fell 11% in the third quarter to 18,993. The total value of arrears owed by customers dropped by 10% to £144.9m during the three month period.

Northern Rock, predominantly a mortgage lender, ran into liquidity problems at the outbreak of the 2007 sub-prime mortgage crisis stemming from the US. The bank then sought emergency liquidity from the Bank of England, stoking fears about its financial stability.

Eventually there was a run on Northern Rock as customers withdrew their deposits for fear of losing them altogether. The government had to intervene and prevent its collapse, leading to Northern Rock's nationalisation.

The government part-nationalised Bradford & Bingley after similar concerns, taking control of the mortgage book and other illiquid assets. Bradford & Bingley's savings arm was bought by Santander.