The European Union has approved proposals to split nationalised Northern rock into two businesses, possibly heralding a partial sell-off.

One of the businesses would function as a “good bank”, containing Northern Rock’s sund assets, including most retail deposits and low-risk mortgages. The remaining “bad” bank would hold the remaining mortgages and repay outstanding government loans.

Northern Rock said the EU’s approval was “an important and positive step”.

Whilst the good bank will eventually be sold to a third party, potentially by the time of next year’s general election, the bad bank will have its assets run down until it goes into liquidation. Potential buyers include Virgin, Tesco Bank and National Australia Bank, which owns the Clydesdale and Yorkshire Bank.

The EU said that splitting Northern Rock in two would allow the good bank to become financially viable in the long-run.

“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,” said EU Competition Commissioner Neelie Kroes.

“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.

The EU will impose caps on the good bank for as long as it is under state control. These include reducing its balance sheet to around a quarter of the size of Northern Rock’s balance sheet before the financial crisis, capping its lending to one-third of Northern Rock’s 2008 levels and limiting its retail deposits to slightly less than pre-crisis levels. Moreover, the bank will not be allowed to become the market leader in terms of interest rates on loans.

Northern Rock has received nearly £27 billion of state aid since its collapse in 2007. Some has already been paid back, and a partial sale could raise several more billion pounds for the company.

This entry was posted on Wednesday, October 28th, 2009 at 3:56 pm and is filed under Banking, Mortgages, Savings. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.