EU to begin Northern Rock aid probe

Anti-trust chief to examine bailout plan to save recently nationalised bank.

EU Competition Commissioner Neelie Kroes
Kroes said that not all details of the UK's rescue plan had been sent to the European Commission [AFP]
Fireproof plan
Kroes said: “The commission needs to open a formal investigation into UK measures to restructure Northern Rock to ensure legal certainty… Rescue aid must be temporary and reversible.”

Britain does not need to change its support for the bank before the EU finishes its investigation.

The EU and the British government are keen that the plan should be fireproof because other banks could challenge an EU decision to approve the rescue package in the European Court of Justice.

After exposure to short-term money markets forced it to seek emergency funding from the Bank of England, Northern Rock fell victim to Britain’s first bank run in more than a century.

Under the government’s rescue plan, the bank will dismiss one-third of its 6,500 staff by 2011 and cut home loans while remaining reliant on state aid.

Jonathan Todd, an EU spokesman, said the banking sector’s troubles underline the importance of what governments can and cannot do to support banks in difficulty.

He said: “The advantage of doing an investigation… will be that it will give guidance to others as to how these things should be handled.”

Todd insisted that putting a limit on the funding did not imply that the EU believed government support so far has been too high.

He said: “We simply need to make sure that the money is used, amongst other things, to ensure proper restructuring.”

Incomplete information

Under EU rules, if a government gives such aid for longer than six months, it must file a longer-term restructuring plan that limits new funding to the bare minimum and sets out how the company would become profitable again.

Customers queue to withdraw their deposits
at a Northern Rock branch in London [AFP]

Britain filed such a plan on March 17 which provided for cutting the bank’s lending and balance sheet, rebuilding deposits and repaying over time the government and Bank of England loans and guarantees.

However, Kroes said that not all details of the plan had been communicated to the commission.

EU officials refused to say what they were still looking for but Kroes said she had called on the British authorities to provide more information.

She also said she would be inviting “third parties”, including banking sector representatives, to “comment on whether the plan’s proposals for avoiding undue distortions of competition are adequate”.

Todd said EU regulators had received complaints from outside sources but refused to name them.

It is known that Danish banks have written to the commission to protest against the rescue plan.

Northern Rock plans to close its Danish savings banks but keep open others in Ireland and Guernsey.

Source: News Agencies