European Commission approves Northern Rock split

28 October 2009 | By Natalie Holt

The commission says it is satisfied that the package of measures proposed by Northern Rock will allow what has been dubbed as the ‘good’ bank to continue in the long-term while enabling the “orderly liquidation” of the so-called ‘bad’ bank, without being a threat to competition.

Neelie Kroes, competition commissioner at the EC, says: “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.”

Northern Rock says now that the restructure of the bank has been approved the lender can strengthen its capital and liquidity, as well as enabling Northern Rock to be an active participant in the UK mortgage market.

The restructure is expected to be a done deal by the end of the 2009, subject to approval by the Financial Services Authority.

The lender says Northern Rock customers are unaffected and will be kept informed as to the progress of the split.

Gary Hoffman, chief executive of Northern Rock, says: “Receiving approval from the EC is an important and positive step for Northern Rock, our customers, employees and the government. 

“We are making good progress towards achieving the legal and capital restructure and will continue to work with the government and the FSA to achieve the necessary approvals.

“We are delivering on our promises.”

Once the restructure has completed Northern Rock will be divided into two companies.

Northern Rock plc will hold and manage all customer savings accounts and some existing mortgages.

It is proposed to be authorised as a deposit taker by the FSA and will offer new savings products. 

Northern Rock plc will also offer new mortgage lending to support the government’s objective of increasing mortgage supply and sustaining a competitive market.

The second company will be known as Northern Rock (Asset Management) plc.

This will hold and service the balance of the existing residential mortgage book and, subject to FSA approval, will be regulated as a mortgage provider, not a deposit taking bank. 

Northern Rock says that some 90% of the mortgages held by Northern Rock (Asset Management) will be fully performing and are not in arrears, and so should not be described as a ‘bad’ bank. 

The portfolio will include mortgages backing the Granite securitisation vehicle and covered bond programmes.  

Northern Rock (Asset Management) will not offer any new mortgage lending, but will hold all unsecured loan accounts, the government loan and Northern Rock’s current wholesale funding and subordinated debt instruments. 

Both companies will still have to comply with the following state aid rules:

• Northern Rock plc will limit new lending volumes to £4bn in 2009, £9bn in 2010 and £8bn in 2011. 
• Northern Rock plc will maintain retail deposit balances across the UK, Ireland and Guernsey at or below £20bn until the end of 2011. 
• Northern Rock plc will not rank in the top three of Moneyfacts mortgage categories for two, three or five-year fixed or variable mortgages before the end of 2011 (excluding mortgages with an LTV ratio of greater than 80% and products for first-time buyers).
• Northern Rock (Asset Management) plc will continue to hold all existing subordinated debt and, where it is contractually able, will not pay principal or coupons on these instruments while it is in receipt of state aid. 

The government loan made to Northern Rock will remain in Northern Rock (Asset Management) and the loan balance will increase by £8bn once the deal is finalised.

Northern Rock says the loan relates to the transfer of the deposit book to Northern Rock and will enable it to provide new mortgage lending. 

Paul Myners, financial services secretary to the Treasury, says: “The government’s actions over the past two years to stabilise Northern Rock have protected the savings and deposits of hundreds of thousands of British families.

“Today’s announcement is an important milestone for the bank and its staff.”

He says that the goverrment guarantees protecting Northern Rock depositors remain in place.

Myners adds: “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.”