State aid: Commission approves restructuring package for Northern Rock
European Commission - IP/09/1600 28/10/2009
Brussels, 28 th October 2009
The European Commission has approved under EC Treaty state aid rules a package of measures to support the restructuring of UK mortgage bank Northern Rock. The bank will be split into a 'good' bank that will continue the economic activities of Northern Rock and a 'bad' bank, an asset management company which will run down the remaining assets. Following an in-depth investigation launched in April 2008 (see and ), which was extended due to substantial amendments to the original plan in May 2009 (see ), the Commission has concluded that the aid is compatible with the EU rules on state aid (Article 87(3)(b) of the EC Treaty), and with the Commission's Communications on the application of the state aid rules to banks in times of crisis (see , , and ). In particular, the Commission is satisfied that the package of measures, including the split, will restore the long-term viability of the 'good' bank and will allow orderly liquidation of the 'bad' bank, without unduly distorting competition.
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. 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."
The Commission’s investigation found that the aid package in the UK's revised restructuring plan was kept to a necessary minimum. The UK Government financial support includes recapitalisation measures of up to GBP 3 billion, liquidity measures of up to GBP 27 billion and guarantees covering several billions of pounds of liabilities. The Commission also concluded that the restructuring is capable of restoring the 'good' bank's long-term viability as it will have only limited exposure to Northern Rock's risky past lending. Therefore, it will be able to operate without state support in the long-term and will be eventually sold to a third party. Moreover, the aid package will enable the 'good' bank to continue to provide lending to the real economy. The restructuring measures will correct the excessive expansion of Northern Rock pre-crisis and its market share will be less than half of the pre-crisis level. This limits competition distortions in the UK market created by the economic advantage the bank received through the state support. Conversely, the 'bad' bank (the asset management company) will run down the past loans over a longer period of time and eventually be liquidated.
Northern Rock plc is a mortgage lender based in Newcastle-upon-Tyne. Prior to its difficulties, it grew rapidly and became the UK's fifth largest mortgage bank, with a balance-sheet total of GBP 101 billion (at the time €150 billion) as of 31 December 2006 and a market share of close to 10% in the mortgage lending business.
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 until its restructuring, the UK granted several rescue measures, which were temporarily approved by the Commission (see and ) in December 2007. In March 2008, the UK notified a restructuring plan for Northern Rock. This plan provided for a reduction in Northern Rock's lending operations and in the size of its balance sheet. The bank started to reduce its market presence in accordance with that plan in March 2008. The Commission started a formal investigation on the restructuring plan on 2 April 2008 (see and ). Northern Rock was adversely affected by the further worsening of the financial markets and the real economy. As a result, the UK authorities submitted a revised restructuring plan in March 2009. The main change introduced is the split of Northern Rock into two entities, a relatively small 'good' bank (with an opening balance sheet of around 20% of Northern Rock's balance sheet pre-crisis) which would continue commercial activities (i.e. mortgage lending and deposit taking), and a 'bad' bank holding the majority of the risky mortgage loans made by Northern Rock in the past. The Commission extended the scope of its investigation, to include the changes to the restructuring plan on 7 May 2009 (see ).
The non-confidential version of today's decision will be published in due course in the EU Official Journal in all EU languages.