EU backs Northern Rock split
Updated on 28 October 2009
Plans to split up Northern Rock take another step with the news that the European Commission had given its approval to divide the bank in two. Ben King reports.
The news comes as fevered speculation hit shares in two other state-owned banks, Royal Bank of Scotland and Lloyds, with rumours that they may also face a break-up.
The EU competition commissioner approves the government's plans to split Northern Rock into a "good" and a "bad" bank, with the aim of selling off the good bank.
The "good bank", containing its sound assets - including most retail deposits and low-risk mortgage loans - can then be sold off.
The remaining "bad bank", set up to house unsecured debt and mortgage assets including those in its Granite securitisation programme, will remain under state control.
Long-awaited approval of the split under EU state aid rules, including another government cash injection, was announced by Europe's Competition Commissioner Neelie Kroes, who 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.
"This decision demonstrates once again that the EU's state aid rules provide an appropriate framework to allow state support for a sustainable restructuring of banks without giving individual banks an unfair competitive advantage."
The EU's backing gave a boost to Prime Minister Gordon Brown's hopes of completing a partial sale ahead of next year's general election. If economic recovery kicks in, the bank could even be sold off profitably in the long term.
Nearly £27bn of state aid has gone to Northern Rock since its collapse in 2007. Some has already been repaid, and a partial sale of the bank now could put another multi-billion-pound sum back in the Treasury's credit account.
The prospect follows months of detailed EC analysis of the restructuring package put forward for approval by the Government after Northern Rock was nationalised in February 2008.
