Northern Rock 'cut up' plan to be cleared by EU

Wednesday, 28 October 2009 11:38

Plans to cut up Northern Rock and sell it off have been cleared by European authorities.

The government plans to cut up Northern Rock so the 'good bank' holds branches, new lending and savings, which can be sold off, and the book of existing mortgages is kept 'in the bad bank'.

Clearance for the deal came today from the European Commission.

Gary Hoffman, Northern Rock chief executive, said today the plan was for the lender to "ultimately return to the private sector" but no timetable was in place and the bad bank "was not a parking place for toxic assets".

He added it may take a decade for the debt to the taxpayer to be cleared.

Under the deal, the Treasury will be providing a further £8 billion for the bad bank, so the good bank can increase lending.

Saving deposits at Northern Rock are "pretty close" to a self-imposed cap of £20 billion, Mr Hoffman said.

Northern Rock has confirmed the restructuring will now be completed by the end of the year. Some ten per cent of the loans on the 'bad bank' Northern Rock (Asset Management) plc will be in arrears, although Mr Hoffman stated this did not mean they were going to be a loss.

Competition Commissioner Neelie Kroes said: "The failure of Northern Rock would have had major detrimental effects on the UK mortgage market and the overall financial stability of the UK economy.

"Important structural changes, including the split of the bank into two entities and a significant reduction of its market presence will allow the bank to become viable in the long-term and limit distortions of competition."

Customers of the Novocastrian mortgage lender are being told: "It is business as usual and they need take no action".

The next move would be for the government to find a buyer for the good bank.

The Treasury has previously admitted offers from interested parties have come forward - and the reports have linked both Tesco and Virgin, which initially made a bid before the nationalisation in 2008, to an offer.

The government support for Northern Rock included £3 billion to recapitalise the bank and liquidity measures of £27 billion, as well as guarantees on savers cash.

The guarantee will be reviewed after the restructuring, and Mr Hoffman said it was unlikely it could remain with a new buyer. However, caps on business would hold to the end of 2010.

The debt to the government held by the Northern Rock (Asset Management) will be £8 billion.

There have been calls for Northern Rock to be turned into a building society to maintain its long-term stability.

Liberal Democrat Treasury spokesman Vince Cable said a quick sale could end up with the taxpayer losing out on the deal.

"I fear that what might come out of this is that the better bits of the bank will be sold off and sold off cheaply to a private buyer," he said.

"The rubbish - the really bad irresponsible loans, the 125 per cent mortgages - they will be left with the taxpayer which will eventually accrue very large losses."

New mortgage lending at Northern Rock is expected to stand at £4 billion for 2009.

The lender is limiting its position while it is under stake control to 1.5 per cent of the savings markets and 2.5 per cent of the new mortgage market.

At the height of Northern Rock, it had a market share of ten per cent.

The lender has also pledged not to rank in the top three of Moneyfacts mortgage categories for two, three or five year fixed or variable mortgages before the end of 2011 - except for deals for first-time buyers and loan-to-value mortgages over 80 per cent.

City minister Paul Myners said: "The government's objectives in relation to Northern Rock are to support financial stability, protect depositor's money and protect the interest of the taxpayer.

"The government announced in its white paper in July that one of the conditions for the eventual sale of the bank will be that it must promote competition in the banking sector."

There have been suggestions the European Commission could also soon rule on the position of Lloyds Banking and Royal Bank of Scotland.

It is reported there could be moves to make the lenders sell off parts of their businesses in exchange for state aid and to improve competition in the UK market.

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