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| EU approves Northern Rock split | EU approves Northern Rock split |
| (30 minutes later) | |
| The European Union (EU) has approved plans for nationalised bank Northern Rock to be split in two - paving the way for a partial sale. | The European Union (EU) has approved plans for nationalised bank Northern Rock to be split in two - paving the way for a partial sale. |
| One business, described as the "good" bank, would hold savers' money, carry out new lending and hold some existing mortgages. | One business, described as the "good" bank, would hold savers' money, carry out new lending and hold some existing mortgages. |
| A second "bad" bank would be set up to hold the rest of the mortgages and repay outstanding government loans. | A second "bad" bank would be set up to hold the rest of the mortgages and repay outstanding government loans. |
| Northern Rock said the EU's approval was "an important and positive step". | |
| The EU said the decision would allow the "good" bank to become "viable" in the long-term. | |
| "This decision demonstrates once again that the EU's state aid rules provide an appropriate framework to allow state support for a sustainable restructuring of banks without giving individual banks an unfair competitive advantage," EU Competition Commissioner Neelie Kroes said. | "This decision demonstrates once again that the EU's state aid rules provide an appropriate framework to allow state support for a sustainable restructuring of banks without giving individual banks an unfair competitive advantage," EU Competition Commissioner Neelie Kroes said. |
| While the "good" bank will be eventually sold to a third party, the "bad" bank will run down its remaining assets and will eventually be liquidated, the EU said. | |
| Imposed limits | |
| European Commission spokesman Jonathan Todd said there would be caps on the "good" bank, for as long as it is in public ownership. | |
| They include: | |
| • its balance sheet will be reduced to about a quarter of Northern Rock's balance sheet before the crisis | |
| • it will not be able to be the market leader in terms of interest rates on loans | |
| • a cap on its lending to one-third of Northern Rock's 2008 levels | |
| • a cap on its retail deposits of slightly less than the pre-crisis level. | |
| 'Excessive expansion' | |
| The EU launched an investigation into Northern Rock in April 2008, two months after the bank was nationalised. | The EU launched an investigation into Northern Rock in April 2008, two months after the bank was nationalised. |
| The investigation found that the aid package the UK government provided was kept to a "necessary minimum". | The investigation found that the aid package the UK government provided was kept to a "necessary minimum". |
| Total taxpayer support for the bank has amounted to £26.9bn, although most has now been repaid. | Total taxpayer support for the bank has amounted to £26.9bn, although most has now been repaid. |
| The plan is that the remaining amount will be repaid by the end of 2010. | The plan is that the remaining amount will be repaid by the end of 2010. |
| The EU added that the restructuring would "correct the excessive expansion of Northern Rock pre-crisis" and would reduce its market share to less than half of the pre-crisis level. | The EU added that the restructuring would "correct the excessive expansion of Northern Rock pre-crisis" and would reduce its market share to less than half of the pre-crisis level. |
| In a statement, the bank said: "This approval is an essential requirement of the planned legal and capital restructure, which is central to the business plan for Northern Rock." | |
| "The restructure will strengthen the capital and liquidity position of Northern Rock significantly, and offers value for money to taxpayers." | |
| Northern Rock added that it was "business as usual" for customers. | |
| 'Good signal' | 'Good signal' |
| Speaking ahead of the EU's announcement, the chairman of the Treasury Committee, John McFall, said he thought the decision to split Northern Rock was a good one. | |
| FROM THE TODAY PROGRAMME More from Today programme | FROM THE TODAY PROGRAMME More from Today programme |
| "It provides a healthy bank, and it provides confidence to the market and it's a good signal," he told the BBC. | "It provides a healthy bank, and it provides confidence to the market and it's a good signal," he told the BBC. |
| But the Liberal Democrat Treasury spokesman Vince Cable said he was "deeply suspicious" of the move. | But the Liberal Democrat Treasury spokesman Vince Cable said he was "deeply suspicious" of the move. |
| "I fear that what might come out of this is that the better bits of the bank will be sold off and sold off cheaply to a private buyer, and the rubbish - the really bad irresponsible loans, the 125% mortgages - they will be left with the taxpayer which will eventually accrue very large losses," he said. | "I fear that what might come out of this is that the better bits of the bank will be sold off and sold off cheaply to a private buyer, and the rubbish - the really bad irresponsible loans, the 125% mortgages - they will be left with the taxpayer which will eventually accrue very large losses," he said. |
| New players | New players |
| Meanwhile, reports say Royal Bank of Scotland and Lloyds will also be split. | Meanwhile, reports say Royal Bank of Scotland and Lloyds will also be split. |
| Reports in recent months have suggested that Lloyds - which bought HBOS at the height of the crisis - will spin off its Cheltenham & Gloucester business. Meanwhile RBS is expected to separate out its old Williams & Glyn brand. | Reports in recent months have suggested that Lloyds - which bought HBOS at the height of the crisis - will spin off its Cheltenham & Gloucester business. Meanwhile RBS is expected to separate out its old Williams & Glyn brand. |
| Ministers are thought to want more competition in the market, believing the sector is too dominated by Barclays, HSBC, RBS and Lloyds. | Ministers are thought to want more competition in the market, believing the sector is too dominated by Barclays, HSBC, RBS and Lloyds. |
| Even if the UK government did not act, the European Commission may force Lloyds and RBS to spin off some of their subsidiaries in an attempt to prevent banks that are being propped up by state aid from having too much of a stranglehold on the market. | Even if the UK government did not act, the European Commission may force Lloyds and RBS to spin off some of their subsidiaries in an attempt to prevent banks that are being propped up by state aid from having too much of a stranglehold on the market. |
| If RBS and Lloyds did have to sell off some of their branch networks, it could lead to an "interesting shake-up" of the banking system, the BBC's chief economics correspondent Hugh Pym said. | If RBS and Lloyds did have to sell off some of their branch networks, it could lead to an "interesting shake-up" of the banking system, the BBC's chief economics correspondent Hugh Pym said. |
| New players such as Tesco or Virgin could enter the market, increasing competition, he said. | New players such as Tesco or Virgin could enter the market, increasing competition, he said. |
| New strategy | New strategy |
| Now that the EU has approved the division of Northern Rock, the government will begin exploring sale options. | Now that the EU has approved the division of Northern Rock, the government will begin exploring sale options. |
| While the "bad bank" is likely to remain in government hands for some time, a deal for the rest of the business could potentially be completed before the general election next year. | While the "bad bank" is likely to remain in government hands for some time, a deal for the rest of the business could potentially be completed before the general election next year. |
| Among those named as potential buyers of the "good" bank are Virgin and National Australia Bank - owner of the Clydesdale and Yorkshire Bank. | Among those named as potential buyers of the "good" bank are Virgin and National Australia Bank - owner of the Clydesdale and Yorkshire Bank. |
| Revenue from the sale would be returned to the taxpayer. | Revenue from the sale would be returned to the taxpayer. |
| Northern Rock was rescued from collapse in the autumn of 2007, and was formally nationalised the following February. | Northern Rock was rescued from collapse in the autumn of 2007, and was formally nationalised the following February. |
| The idea of a split was first outlined this year as part of a changed government strategy for the bank. | The idea of a split was first outlined this year as part of a changed government strategy for the bank. |
| Earlier this year Northern Rock said it would slow down its previous plan, which had been to raise money by redeeming its mortgage loans as fast as possible. | Earlier this year Northern Rock said it would slow down its previous plan, which had been to raise money by redeeming its mortgage loans as fast as possible. |
| At the government's behest it has now agreed to start expanding its lending again, by an extra £14bn worth of mortgages in the next two years. | At the government's behest it has now agreed to start expanding its lending again, by an extra £14bn worth of mortgages in the next two years. |