Northern Rock to get the green light

Northern Rock

The plans to split Northern Rock's better assets from its high risk mortgages are set to get the green light from Europe's competition commission next week.

The go-ahead for this plan would give the government hope that it can sell the better assets before next summer.

European Commission approval should mean plans to split off Northern Rock's deposit accounts and low risk mortgages can be concluded by the end of the year, and that news should get the would-be bidders circling, CityWire reports.

The Financial Times, meanwhile, said the European Commission is expected to authorise the "good bank, bad bank" plan next Wednesday, when it holds its final session before its five-year terms expires at the end of the month.

Larger UK banks will more than likely not be allowed to bid for the business and the government has already said it hopes to bring new players into the UK mortgage market.

Over the summer, reports emerged that Tesco might be interested as part of its plans to increase its financial arm. In 2007, before the government took control of the business, both Richard Branson's Virgin and an investment firm headed up by former Abbey boss Luqman Arnold had expressed interest in the firm.

Government help

However, Northern Rock collapsed after writing too many higher risk loans, especially the now infamous 125 percent mortgages.

As the housing bubble began to deflate and wholesale lending began to freeze the bank was forced to ask for government help. As the crisis escalated, customers panicked and the government decided to take the group under government control in February 2008.

In August this year Northern Rock said retail deposits were down to GBP£18.4 billion from GBP£19.6 billion at the end of December and losses were up 24 percent as it had to write off an increasing number of bad loans.

It said then it owed the government nearly GBP£11 billion having paid back billions of pounds thanks to cash generated from persuading borrowers to remortgage with other lenders.

Given the recent more encouraging news on the UK economy and positive noises on the housing market and bad loans from banks such as Lloyds, the government will be hoping it can sell the business for a modest price in order to recoup the money they ploughed into the banking group.

While bidders are likely to drive a hard bargain, any sale is likely to be claimed as a victory and proof that the government promise to make a profit from the banking sector bailout is on track.

Northern Rock is already limited to writing just 1.5 percent of retail deposits and 2.5 percent of new mortgage lending.

Any potential buyer would be conscious that the 100 percent government guarantee on deposits held with the bank will have to be withdrawn at some point.

Northern Rock said the bank "continued to work with the government and the Commission towards a decision, which we expect shortly."

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