Financial Regulatory Forum

EU clears Northern Rock break-up plan, paves way for sale

By Reuters Staff
October 28, 2009

A woman is reflected as she passes a branch of Northern Rock in London August 4, 2009. (File Photo).  REUTERS/Luke MacGregor   (BRITAIN BUSINESS)  By Foo Yun Chee and Clara Ferreira-Marques
BRUSSELS/LONDON, Oct 28 (Reuters) – European Union
regulators have approved a UK government plan to break up
state-owned mortgage bank Northern Rock, in a move that clears the way for the sale of key parts of the battered lender.

The blueprint proposed by British authorities and approved by Brussels was aimed at easing EU concerns over unfair competition and state aid.

It will see the creation of a new savings and mortgage bank, Northern Rock Plc, which will take deposits and offer savings products and home loans.

This is expected to be the focus of interest from buyers hoping to step into the competitive but lucrative UK market, though analysts say there are few obvious buyers.

The remainder of the bank, one of Britain’s most aggressive lenders before it succumbed to the credit crunch, will become Northern Rock Asset Management, holding existing mortgages and unsecured loans but will be closed to new lending.

This portion has been dubbed the “bad bank”, though Northern Rock said on Wednesday 90 percent of mortgages included in the arm would be fully performing and are not in arrears.

“The good news is that we can move forward with the Northern Rock recovery plan, that’s a significant step forward,”said a spokesman for British Prime Minister Gordon Brown.

“It will mean that Northern Rock can return to the mortgage market and support the economic recovery.”

The European Commission is reviewing a raft of bank bailouts across the 27-country EU, with many lenders expected to divest assets, close branches and cut market share in return for regulatory approval for state aid.

One prime example of regulatory-driven changes in European banking came on Monday as aided Dutch bancassurer ING said it would split its operations, leaving the firm’s balance sheet 30 percent smaller than before its bailout.

“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,” EU Competition Commissioner Neelie Kroes said in a statement.

“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,” she said.

Northern Rock said it expected to complete the split by the end of 2009, upon which management of the bank’s assets will pass from the Treasury to UK Financial Investments, the body which also manages the government’s stakes in bailed-out banks Lloyds and Royal Bank of Scotland.

UKFI has been set up to progressively sell off the British government’s stakes in the banks.

RBS and Lloyds 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.

Belgian daily De Tijd 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.

Commerzbank, Germany’s second-largest bank, led the regulator-driven restructuring in May when it reduced its balance sheet by about 45 percent to satisfy Commission
concerns.

(Additional reporting by Tim Castle; Editing by David Cowell)
((clara.ferreira-marques@reuters.com; +44 207 542 3214; Reuters
Messaging: rm://clara.ferreira-marques.reuters.com@reuters.net))

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