EU clears Northern Rock 'bad bank'

Regulators back creation of "bad bank" to take over toxic assets from bailed-out lender.

    Kroes backed measures taken by the UK government to rescue and nationalise Northern Rock [AFP]

    Measures backed

    The commission also approved the measures taken by the government, beginning in 2007, to rescue and nationalise Northern Rock which was the first British bank to fall victim to the global financial crisis.

    The bank, once the country's fifth biggest lenders, saw the first run on a British bank since 1866 when its wholesale borrowing dried up during a credit crunch that saw customers lining up to withdraw their cash in September 2007.

    The government gave Northern Rock $44bn in loans and assumed contingent liabilities of $48bn in an effort to keep it afloat, before resorting to nationalisation on February 22, 2008.

    Backing the move, Kroes 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".

    Lloyds and Royal Bank of Scotland, two bailed-out British banks, are also awaiting commission state-aid rulings, along with Franco-Belgian Dexia and Belgium's KBC.

    Lloyds, Britain's largest retail bank, is expected to be told to sell off branches to reduce its share of UK deposits, while RBS is expected to be told to reduce its share of the banking market for small and medium-sized businesses.

    De Tijd, a Belgian newspaper, said on Wednesday that KBC could avoid an ING-style split, as it would be told to shrink its balance sheet but not to divest its insurance activities.

    Bank restrictions

    In its statement on the future of Northern Rock, the commission said on Wednesday that it was "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''.

    Jonathan Todd, an EU commission spokesman, said that the "good" bank would still face a number of restrictions, including not being allowed to be a market leader in interest rates on loans and faces caps on lending and retail deposits.

    He said its balance sheet would be reduced to a quarter of Northern Rock's status before the crisis hit.

    "There are sufficient restrictions on the activities of the good bank to ensure that there will not be any disproportionate distortion of competition and at the same time we recognise that bank will continue to play a valuable role, notably in loans to the real economy," Todd said.

    Following the commission's decision, the British government might now go ahead with a partial sale of the bank's assets in the coming months.

    Unite, Britain's largest union, has called on the government to re-mutualise the "good bank" created from the Northern Rock split to make the mortgate lender a building society owned by its customers.

    Rob Macgregor, Unite's national officer, said: "Northern Rock should be re-mutualised and returned to the local community from where it came. There can be no back-door deals to sell it to the highest bidder."

    Northern Rock was de-mutualised in 1997, a process that some critics argue led the mortgage lender to take more risks in response to shareholder pressure. 

    SOURCE: Agencies


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