Europe approves plan to divide Northern Rock

28 October 2009

The European Union has given the the green light to plans to split Northern Rock into a ‘good’ bank and a ‘bad’ bank.

The restructure of the nationalised bank will allow £50 billion of mortgages and £30 billion of unsecured loans and Treasury assets to be held in AssetCo, while Rock's £20 billion retail deposits and branch network would become known as BankCo.
BankCo – the so-called ‘good’ bank – will then be sold off for as much as £1.5 billion, while AssetCo remains in state hands.
EU Commissioner Neelie Kroes said that the split will allow the bank to become "viable in the long term and limit distortions of competition".
Media reports suggest that senior UBS banker Robin Budenburg will be named as the new boss of UK Financial Investments, which would oversee the split and the subsequent sale.
The long-awaited move has raised hopes that a partial sale of the business could go through before the general election next year, with the split expected to be complete by the end of the year.
Under current plans, Northern Rock has agreed to keep its share of retail deposit balances at less than 1.5% of the market and to limit its share of gross mortgage lending to under 2.5% a year. Brussels is expected to stipulate more restrictions at a later point.
The government is also considering turning Northern Rock into a building society although this option has less public support. A sale would help repay some of the £27 billion loan the government has injected into the troubled bank since its collapse in 2007.
Most of this sum has already been repaid, with the outstanding amount in line to be paid off by 2010.
Potential buyers of the ‘good’ bank are rumoured to include Virgin and National Australia Bank, which already owns the Clydesdale and Yorkshire Bank.
David Buik, an economist at BGC Partners, says: “It is obviously the intention of the government to sell off branches from Royal Bank of Scotland, Lloyds Banking Group, Northern Rock and Bradford & Bingley to new kids on the block. Tesco is an obvious choice and would be popular.”
Tesco recently applied to the Financial Services Authority for a full banking license.
The big five high street banks will be forbidden from bidding for assets in an attempt to introduce more competition into the sector.
Plans to break-up RBS and Lloyds are expected to follow in a matter of weeks. Lloyds, which is 43% owned by the taxpayer, could be ordered by Brussels to reduce its share of the banking market from 30% to 25%.
RBS, meanwhile, is working on plans to sell off several hundred branches.

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