Northern Rock sale moves closer

Today the European Commission has approved the plan for the nationalised bank Northern Rock, to be split into a "good bank" and a "bad bank" to try and recover the much-needed taxpayer money.

The approval will give a lift to the Government's ambition to sell the troubled mortgage specialist's good assets before the next election. Analysts believe they could fetch as much as GBP£1.5 billion.

One business, described as the "good bank", would hold savers' money, carry out new lending and hold some existing mortgages. A second "bad bank" would be set up to hold the rest of the mortgages and repay outstanding government loans.

Northern Rock told the BBC that the EU's approval was "an important and positive step".

Restraints

The EU said the decision would allow the good bank to become viable in the long-term.

"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," EU Competition Commissioner Neelie Kroes said.

European Commission spokesman Jonathan Todd said there would be caps on the good bank, for as long as it is in public ownership.

A sale would be managed by UK Financial Investments, which is set to name Robin Budenberg, a senior UBS banker, as its new chief executive. Budenberg will replace John Kingman at the body in charge of the taxpayers' stakes in the banks.

In agreeing to his new role, Budenberg will be taking a massive pay cut from a million-pound-plus bonus and salary package at UBS, where he earned GBP£143,000 a year in the role.

It is expected that Budenberg will be appointed within days, after the Chancellor's approval. It will make him one of the most powerful figures in British banking, responsible for GBP£35 billion of taxpayer money through the 70 percent stake in Royal Bank of Scotland and 43 percent in Lloyds Banking Group.

Budenberg has become a key figure after advising the Government over the replacement of Railtrack by Network Rail in 2002 and more recently in helping design last October's bank rescue.

Funds

According to British newspaper The Telegraph, the sale of Northern Rock's "good bank" would only recover a small portion of the state funds extended to the lender. Under the current plan, the Government will increase its loan to Northern Rock by about GBP£8 billion to GBP£23 billion, which will only be fully recovered if the "bad bank" is run down successfully over several years or is sold off profitably.

Virgin Money and National Australia Bank are expected to put offers on the table for Northern Rock's "good bank."

It is expected that the Treasury will stress it will not sell the business to any of the UK's biggest lenders, in an effort to boost competition.

The Commission is also expected to force Lloyds Banking Group and Royal Bank of Scotland to spin off subsidiaries, adding more new entrants to the market. Lloyds is expected to separate Cheltenham & Gloucester, and RBS its old Williams & Glyn brand.

EU decision

The EU decision on Northern Rock also marks the first decision by Neelie Kroes, the competition commissioner, for a UK bank.

The Telegraph reports that Kroes said in a statement, "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."

Under the plan, all of Northern Rock's GBP£18.5 billion of customer deposits will be transferred into BankCo - the so-called "good bank", along with about GBP£10 billion of good mortgages and GBP£8.5 billion of cash. AssetCo - the "bad bank" - will be left with the other GBP£50 billion of mortgages and GBP£30 billion of unsecured loans and Treasury assets.

Some GBP£3 billion of the Government's existing GBP£15 billion loan will be converted into capital, with about half placed in the "good bank". Another Government loan of GBP£8 billion will be made to the "good bank" to issue new mortgages, while responsibility for paying off the loan will remain with the "bad" counterpart.

As that runs down, the first GBP£40 billion of redeemed mortgages will be used to pay bondholders in Northern Rock's GBP£30 billion securitisation vehicle, Granite, and GBP£10 billion of covered bonds.

Only after that will taxpayers start to recover their GBP£20 billion loan. About GBP£2 billion of bondholders' money will be put at risk alongside the GBP£3 billion of taxpayer capital.

Northern Rock is expected to complete the legal separation by the end of the year.

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