EU Probes UK Restructuring Aid Package For Northern Rock

by Carla Johnson, Investors Offshore.com, London

02 April 2008

The European Commission on Wednesday announced that it 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 March 17th, 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 explained that:

"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, based in Newcastle-upon-Tyne, was the UK's 5th largest mortgage bank, with a balance-sheet total of GBP101bn (then EUR150bn) as of December 31st, 2006.

Northern Rock's core activity is residential mortgage lending, which represents more than 90% of all outstanding loans made by the bank.

On December 5th, 2007 the Commission authorised state aid measures that the UK had taken in favour of Northern Rock on September 17th and October 9th 2007, finding that they complied with the rescue aid provisions of the Community Guidelines on state aid for rescuing and restructuring firms in difficulty.

This decision also authorised another rescue aid measure taken on December 18th, 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 March 17th 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 this 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.

Earlier this week, Northern Rock announced that it intended to pay back all monies owed to taxpayers by 2010.

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