Northern Rock split-up approved
News Article Date: Wednesday 04th of November 2009
The European Commission (EC) has approved plans to split Northern into two parts: a ‘good' bank with profitable assets and a ‘bad' bank containing its toxic debt.
The approval means the government, which owns the bank, will now be able to go ahead with the sale of the mortgage lender’s good assets before the election next year.
The EC wants to ensure that those banks that were bailed out by taxpayer funds are not given an unfair competitive advantage in the market, and hence its approval was necessary for the restructure of Northern Rock to progress.
Neelie Kroes, the EU Competition Commissioner, 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."
Gary Hoffman, chief executive of Northern Rock said:
“Receiving approval from the European Commission 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."
Analysts believe the sale of the ‘good’ bank could raise up to £1.5bn – a small proportion of the total aid the state gave Northern Rock to keep it from collapse.
Under current plans, the government will increase its loan to the specilaist mortgage lender by about £8bn to £23bn, which will only be fully recovered if the ‘bad bank’ is run down successfully over several years or is sold off profitably.
Virgin Money and National Australia Bank are widely expected to make offers for the ‘good’ bank.
Northern Rock is expected to complete the legal separation by the end of the year.
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