Northern Rock Secures EU's Approval to Divide Into Two Parts
Oct. 28 (Bloomberg) -- The U.K. government won approvalfrom the European Commission to split Northern Rock Plc intotwo parts, moving potentially toxic assets into a new entity.
Northern Rock will be split into a “good” bank, whichwill continue the lender’s profitable operations, and a “bad”bank that will sell the remaining assets, the Brussels-basedcommission said in a statement today.
“The Commission is satisfied that the package of measures,including the split, will restore the long-term viability of the‘good’ bank and will allow orderly liquidation of the ‘bad’ bank,without unduly distorting competition,” the EU antitrustauthority said in today’s statement.
The decision will take Prime Minister Gordon Brown’sgovernment a step closer to selling the first bank itnationalized as the credit crisis roiled financial markets in2007. Ministers may try to find buyers for Northern Rock’smortgages and retail deposits from outside the industry,potentially create three new banks in the next five years. Brownhas said he wants to bolster competition and reduce banks’ fees.
“The important thing is that we increase competition inthe market,” Treasury Select Committee Chairman John McFalltold the British Broadcasting Corp.’s Today program. “Theremust be channels for small and medium-sized companies to getcredit.”
Northern Rock, which offered a 125 percent mortgage called“Together” at the peak of the U.K. property market, requiredan emergency loan from the Bank of England after it suffered thefirst run on a British bank in more than a century in 2007.
Possible Sale
The lender asked the commission to approve its plan todivide into two in June. The units may then be sold to investorstogether or separately, the bank’s Chief Executive Officer GaryHoffman said in August.
The commission probe found that the aid package in theU.K.’s revised restructuring plan was kept to a necessaryminimum. The government provided as much as 3 billion pounds($4.9 billion) in so-called recapitalization measures and 27billion pounds of liquidity as well as guarantees coveringseveral billions of pounds of liabilities, the commission said.
One possible buyer for Northern Rock’s assets is VirginMoney, the consumer-finance part of Richard Branson’s VirginGroup Ltd. Virgin Money applied to the Financial ServicesAuthority for a banking license at the beginning of this month,stoking speculation it may be planning a bid. Branson tried tobuy Northern Rock before the Treasury seized it in February 2008.
Building Societies’ Concern
The sale may also spark concern among Britain’s customer-owned lenders that a revived Northern Rock risks distortingcompetition in the U.K. mortgage and saving markets.
“It’s important that an institution that’s had taxpayersupport over the last two years doesn’t compete unfairly withthe private sector institutions that have struggled through therecession without the support of the government,” Adrian Cole,director-general of the Building Societies Association, toldBloomberg Television in an interview. “It would be quite unfairif Northern Rock comes back to the market squeaky clean, takingall the best-quality business.”
The EU is reviewing government bailouts across Europe toensure state aid doesn’t give some banks an unfair advantage.ING Groep NV plans to raise 7.5 billion euros ($12.3 billion) ina rights offering and sell its insurance operations to winconsent for a taxpayer-funded bailout, it said this week.
The EU forced Commerzbank AG in May to sell assets, and hasindicated that Lloyds Banking Group Plc and Royal Bank ofScotland Group Plc may be pushed to sell assets and branches.RBS fell 8 percent and Lloyds 6 percent yesterday on concernthat the banks will be forced to dispose of more assets thanpreviously forecast.
The Treasury is also talking with Lloyds and RBS abouttheir participation in the government’s Asset Protection Scheme.Lloyds has said it wants to avoid the insurance program forriskier assets and the more than 15 billion pounds in fees itwould cost.
To contact the reporter on this story:Matthew Newman in Brussels at Mnewman6@bloomberg.net.
Last Updated: October 28, 2009 06:45 EDTSource: Bloomberg
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