NORTHERN ROCK will be broken up and parts of the business sold off after the European Commission yesterday waved through a radical restructuring of the nationalised British bank.
The commission said Northern Rock’s plan to split into two – in effect creating a “good” and a “bad” bank – was compatible with state-aid rules.
The competition authorities in Brussels have been looking closely at a number of European banks to assess whether the extensive government support they received at the height of the financial crisis has given them an unfair advantage.
European competition commissioner Neelie Kroes said she was satisfied that the package of measures proposed by Northern Rock would restore the long-term viability of the “good” bank and allow an orderly liquidation of the “bad” bank, without unduly distorting competition.
“The failure of Northern Rock [in 2007] would have had major detrimental effects on the UK mortgage market and the overall financial stability of the UK economy,” Ms Kroes said.
The commission did however impose several constraints on Northern Rock’s ability to write new business.
The bank will have to limit new lending to £4 billion (€4.45 billion) this year, £9 billion next year and £8 billion in 2011. It will also have to ensure its retail deposit balance does not exceed £20 billion.
These constraints could be a deterrent for any potential buyer of the “good” parts of the business. There is no formal timetable for a sale of this business but the process is expected to start at the beginning of next year.
The UK government is keen that the sale promotes more competition in the banking market and is likely to block bids from big established British banks such as Barclays and HSBC. Possible buyers could include Virgin Money, Richard Branson’s finance arm; Tesco, the supermarket chain; and possibly European banks such as BBVA.
The “good” bank will hold all of Northern Rock’s retail deposits and a proportion of its lower-risk mortgage loans.
The rest of its mortgage assets will be placed into a separate asset company – the “bad” bank – that will remain under British government control.
The government, which is going to pump a further £8 billion into Northern Rock to fund the break-up, hopes to complete the split by the end of the year, paving the way for a sale of the “good” parts.
It is thought unlikely that any sale would be agreed before the general election, due to take place by May next year. Some politicians have expressed concern about a politically motivated firesale, which would not maximise value for the taxpayer.
The commission is also looking into the state aid received by Lloyds Banking Group and Royal Bank of Scotland.
Earlier this week it ruled that ING, the Dutch bank, would be broken up and its insurance assets and US business sold off. – (Copyright The Financial Times Limited 2009)
