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State aid: Commission launches in-depth investigation into UK restructuring aid package for Northern Rock

Commission Européenne - IP/08/489   02/04/2008

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IP/08/489

Brussels, 2nd April 2008

State aid: Commission launches in-depth investigation into UK restructuring aid package for Northern Rock

The European Commission has launched an in-depth investigation under the EC Treaty’s rules on state aid into the UK authorities' package of measures to support the restructuring of Northern Rock, the UK mortgage bank. The Commission received the notification of these measures on 17th March 2008. The opening of an in-depth investigation gives interested parties the possibility to comment on the proposed measures but it does not prejudge the outcome.

Competition Commissioner Neelie Kroes said "The Commission needs to open a formal investigation into UK measures to restructure Northern Rock to ensure legal certainty, notably in view of the large scale of the aid measures, the background of current conditions in financial markets and the risks of distortion of competition. I look forward to continuing to work closely with the UK authorities and other parties during our investigation."

Northern Rock plc, based in Newcastle-upon-Tyne, was the UK's 5th largest mortgage bank with a balance-sheet total of £101 billion (then €150 billion) as of 31 December 2006. Northern Rock's core activity is residential mortgage lending, which represents more than 90% of all outstanding loans made by the bank.

On 5 December 2007 the Commission authorised state aid measures the UK had taken in favour of Northern Rock on 17 September and 9 October 2007, finding that they complied with the rescue aid provisions of the Community Guidelines on state aid for rescuing and restructuring firms in difficulty (see IP/07/1859 and MEMO/07/545). Today's decision also authorises another rescue aid measure taken on 18 December 2007.

Rescue aid must be temporary and reversible. It must not be given for a duration exceeding 6 months, unless it is converted into restructuring aid through the submission of a restructuring plan. The notification of the Northern Rock restructuring plan on 17th March 2008 (six months after the first rescue aid measure) means that the rescue aid measures for Northern Rock may remain in place while the Commission examines the restructuring plan. The notified aid measures may be declared compatible with EC law if they comply with the Guidelines on rescue and restructuring aid. This requires notably three conditions: i) restoration of long-term viability without further state support ii) aid limited to the minimum necessary to implement the restructuring and iii) avoidance of undue distortions of competition.

The plan submitted by the UK authorities provides for a reduction in Northern Rock's lending operations and in the size of its balance sheet. Over the period of the plan, the bank would repay the loans made by the Bank of England and the UK Government guarantees on its funding operations in the deposit and wholesale funding markets would gradually be phased out. The bank would need to find funding from other sources, notably by rebuilding the level of its retail deposits.

Not all details of the plan have been communicated to the Commission and today's decision requests further information from the UK authorities. The decision also invites third parties to comment on whether the plan's proposals for avoiding undue distortions of competition are adequate.

The text of today's decision, with any confidential information excised, will be published in due course in the Official Journal of the European Communities, together with a meaningful summary in all Community languages. The non-confidential version of the decision will also be made available in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

Background

As a consequence of the ongoing turbulence in the world’s financial markets, a significant rationing of funds in the sterling money markets occurred in August and September 2007 and the mortgage securitisation market virtually closed. This created severe liquidity difficulties for Northern Rock whose business model was particularly reliant on frequently raising finance in these markets.

The recent turbulence in the financial market has caused problems for other institutions which in some cases have also prompted public authorities to intervene. On 27 February 2008 the Commission opened state aid investigations concerning the state bail-outs of IKB and Sachsen LB in Germany (see IP/08/314). It is important to stress that the three cases each present important differences, reflecting the different operations of the institutions concerned and the way in which the conditions in the financial markets have therefore affected them.

See also MEMO/08/202.


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