Northern Rock receives extra £11bn loan
Updated on 28 October 2009
Nationalised Northern Rock plans to split into two banks with the help of an extra £11bn in taxpayer's money which could take a decade to repay.
The admission came as the European Commission approved plans to split the Newcastle-based lender into a "good" and "bad" bank.
The restructuring will see an extra £8bn granted to fund mortgage lending in the "good" bank on top of the outstanding £15bn loan, as well as up to £3bn in capital support from the Treasury.
Chief executive of the bank, Gary Hoffman, has admitted that the new loan would take almost ten years to pay back.
In March last year Northern Rock was aiming to pay back £26.9bn in support by the end of 2010. It changed policy earlier this year as the rapid repayment was draining funds from the crippled mortgage market.
Mr Hoffman said European approval for its plans was an "important milestone" for the bank, which was taken into public ownership in February 2008.
The good bank will be much smaller - holding all of the Rock's savings accounts and some of its mortgages, and offer new home loans to customers.
The bad bank will hold the majority of its loans - more than 90 per cent of which are not in arrears, according to Mr Hoffman - and be gradually wound down.
Despite calls to turn the business back into a building society, Mr Hoffman said he had held no discussions with the government on the subject and added that it would be "quite difficult" to sell the bank back to depositors.
On approving the state aid support to the business, Europe's Competition Commissioner Neelie Kroes: "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."
