State aid: Commission extends in-depth investigation into UK aid package for Northern Rock
European Commission - IP/09/713 07/05/2009
Brussels, 7th May 2009
The European Commission has extended the scope of its in-depth investigation under EC Treaty state aid rules, launched on 2 April 2008 (see IP/08/489), into a UK aid package for Northern Rock, following substantial amendments notified on 30 March 2009. The main change introduced is the split of Northern Rock into a 'good' bank, which would continue commercial activities, and a 'bad' bank with most of the previous mortgage loans, which would be wound down. The Commission has to examine, whether the changes will enable Northern Rock to return to long-term viability while avoiding undue distortions of competition. The extension of the in-depth investigation gives interested parties the possibility to comment on the proposed measures; it does not prejudge the outcome.
Competition Commissioner Neelie Kroes said "The Commission needs to look into the changes made by the UK to the original package for Northern Rock, to ensure legal certainty. In view of the large scale of the aid measures this is standard procedure."
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 rescue aid for Northern Rock (see IP/07/1859 and MEMO/07/545). On 17 March 2008, the UK notified a restructuring plan for Northern Rock. The Commission opened a formal investigation on 2 April 2008, to assess the package with regard to Northern Rock's prospects for a return to long-term viability. In the same decision, the Commission also authorised another rescue aid measure for Northern Rock (see IP/08/489 and MEMO/08/202). On 30 March 2009, the UK authorities notified substantial amendments to the support package for Northern Rock. Today's decision extends the scope of the Commission's investigation, to take account of these changes.
The original plan submitted by the UK authorities provided 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 have repaid the loans granted by the Bank of England and the UK Government guarantees on its funding operations in the deposit and wholesale funding markets would have been gradually phased out. The bank would have needed to find funding from other sources, notably by rebuilding the level of its retail deposits.
The amended plan provides for a split-up of Northern Rock into two new entities, a relatively small bank containing all the good quality assets, the mortgage writing platform and the retail deposits and a "bad bank" which would hold the vast majority of the mortgage loans made by Northern Rock in the past. The "bad bank" would be wound down on a solvent basis, where the UK State would support the losses incurred on the risky mortgage loans made by Northern Rock in the past.
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 EU's Official Journal, together with a meaningful summary in all EU 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.
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.