EU backs Northern Rock good/bad split

EU competition regulators have approved the state aid contained in plans to break up and sell British nationalised bank Northern Rock in the wake of the global financial crisis.

The European Commission said that, after an in-depth investigation, it had decided that the British government help was in line with EU rules.

The aid includes re-capitalisation measures of up to £3 billion, liquidity measures of up to £27 billion and guarantees for liabilities of several billion pounds.

Under the plan bringing Northern Rock back from the brink of collapse, the bank will be split into a 'good bank' that will continue its economic activities, and a 'bad bank' management company to run down the remaining assets.

The commission said it was satisfied that the measures would restore the long-term viability of the 'good' bank and allow orderly liquidation of the 'bad' bank, without unduly distorting competition.

Its ruling comes after Dutch banking and insurance group ING said it would restructure, under pressure from the EU regulator, selling off its insurance operations and raising money to pay back emergency state funds.

According to a report in the Daily Telegraph, the sale of Northern Rock's 'good' assets as early as next year will be handled by UK Financial Investments, which manages government holdings in British banks.

Virgin Money and National Australia Bank, owner of Clydesdale and Yorkshire banks, were named in media reports as possible buyers.

The Independent, meanwhile, said that state-rescued Royal Bank of Scotland and Lloyds Banking Group would also be partially sold off in coming years in British government-backed plans to create more competition in the market.

'We are keen to see greater competition in the banking sector as soon as possible,' an unnamed British government source was quoted by the newspaper as saying.

The three British banks received huge government bail-outs at the height of the global economic crisis but regulatory authorities are concerned about state-backed banks having an unfair advantage over those that were not helped.

Northern Rock, once Britain's fifth-biggest home loan provider, faced potential collapse in September 2007 as banks tightened lending criteria amid uncertainty over exposure to the failing US sub-prime mortgage sector.

The troubled group was forced to request emergency funding from the Bank of England - which sparked the first run on a British bank for more than a century.

Lloyds is expected to face a forced reduction in its share of the retail banking market from 30% to 25%, with the disposal of more than a seventh of its 3,000 branches, according to the Independent. Lloyds is 43% owned by the UK taxpayer. RBS, which is 70% owned by the taxpayer, is working on plans to sell off several hundred branches, the newspaper said.