European Commission backs Northern Rock breakupDivision will create 'good' and 'bad' banks

28 October 2009

The European Commission has approved the breakup of UK mortgage bank Northern Rock into a 'good' bank and a 'bad' bank.

Northern Rock logo

Under the package of measures to restructure Northern Rock, the 'good' bank will continue the trading activities of Northern Rock, while the 'bad' bank will take the form of an asset management company which will run down the remaining assets.

In its report, the Commission reported that it is satisfied that the package of measures, including the split, will restore the long-term viability of the 'good' bank and will allow the orderly liquidation of the 'bad' bank, without unduly distorting competition.

The Commission also concluded that the 'good' bank will be able to operate without state support in the long-term and will be eventually sold to a third party. Widespread media speculation already has Tesco and Virgin as potential suitors.

Which? personal finance campaigner Phil Jones commented: 'The banking sector remains deeply uncompetitive and we want to see new entrants into the market to shake up the system. Whatever the Government decides to do with taxpayer-owned Northern Rock, the litmus test is whether we end up with a greater challenge to the big name banks and a sector that delivers better value and services to customers.'

UK government welcomes Northern Rock approval

The government welcomed the European Commission’s decision to approve the legal and capital restructure of Northern Rock.

Financial Services Secretary to the Treasury Paul Myners said: 'The Government’s actions over the past two years to stabilise Northern Rock have protected the savings and deposits of hundreds of thousands of British families. Today’s announcement is an important milestone for the bank and its staff.'

Why did the Commission investigate Northern Rock?

Because of the credit crunch, Northern Rock’s main funding source, the mortgage securitisation market, dried up. To enable the bank to stay in business, the UK government stepped in and took over the ailing bank.

The European Commission investigation into Northern Rock was launched in April 2008 and considered whether the financial support provided by the government was compatible with EU rules on state aid and with the Commission's communications on the application of the state aid rules to banks in times of crisis. It has now ruled that it was.

Competition Commissioner Neelie 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. 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.'

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