27 November 2007

UK notifies Northern Rock bail-out for state aid clearance - but not all of it

The UK government has notified the European Commission of state aid granted to distressed bank Northern Rock, following a meeting in London yesterday afternoon between competition commissioner Neelie Kroes and UK Chancellor Alistair Darling. MLex has learned that the UK’s position is that at least part of the support granted is not state aid by that member state.

A spokesman for Kroes said today that the notification had been made “last night”. He added that the commission would "reach a decision as soon as possible on whether the aid complied with guidelines on rescue aid."

Any longer term aid, stretching beyond six months, would be analysed from the point of view of restructuring aid, said the spokesman.

On 14 September this year, the Chancellor of the Exchequer authorized the Bank of England to provide a liquidity support facility to Northern Rock against appropriate collateral and at an interest rate premium. This was done by the Bank of England in its capacity as the “lender of last resort”.

Several days later, HM Treasury, with the Bank of England, put in place arrangements that guaranteed deposits in Northern Rock. The Chancellor stated last week to the House of Commons that those guarantee arrangements “have not had any cost to the taxpayer because these deposits covered by the guarantee arrangements remain in the bank”.

On 11 October, the Chancellor told the House of Commons that the Bank’s lender of last resort facility extended to Northern Rock had been “replaced” on 9 October. Terms of the Bank’s replacement facility allowed Northern Rock to put up “all of its assets” as collateral, including its 7.8 billion pounds of unsecured loans. Until this relaxation, the Bank’s original lender of last resort facility to Northern Rock meant the need to minimize risk to the taxpayer had required the Bank to accept only high-quality collateral at a discount. Northern Rock could no longer live with the Bank’s strict criteria as lender of last resort and needed an easing of its penalty lending terms. At that date, total borrowings by Northern Rock from the Bank of England were estimated at around 12.9 billion pounds.

So the package of support granted to Northern Rock has to be viewed as three separate elements: the original liquidity support facility, the guarantee arrangements, and the modified support facility.

On 19 November, last week, HM Treasury made a statement on behalf of the “Tripartite Authorities” (the Treasury, the Bank of England and the Financial Services Authority) that “The Authorities consider that the guarantee arrangements that have already been announced, together with the additional facilities announced on 9 October 2007, amount to State Aid, and will need to be approved by the European Commission”. 

But that statement also indicated that the Authorities did not view the original 14 September liquidity support facility as state aid.

In response to the question whether DG Comp expected to receive a state aid notification with respect to the original liquidity support facility, a spokesman told MLex on 19 November that the EC expected “to receive notification of all forms of state support that might constitute state aid to Northern Rock.”

An HM Treasury spokesman has since said that the government "does not believe that the original facility amounted to state aid, since the Bank of England was lending to Northern Rock in its capacity as lender of last resort. Providing emergency liquidity in this fashion is a core central bank function.”

Sir Richard Branson’s Virgin consortium has now emerged as the preferred bidder for Northern Rock and declared that it would repay 11 billion pounds to the Bank of England at the completion of the transaction if it happens.

It would seem that this initial 11 billion pound repayment will probably go to cover part of what was outlayed by Threadneedle Street under the terms of the initial liquidity support facility before it was modified.

What has been lent from 9 October onwards, amount unknown, under the modified support facility, is state aid of one sort or another. If it is judged to be rescue aid, then it will have to be paid back within six months. If it is judged restructuring aid, which it will be if it lasts more than six months, then it will need to be accompanied by a plan which ensures the bank and its new owners don’t unfairly benefit from the UK’s largesse.

For the moment at least, all indications are that the goverment believes the notified package is rescue aid, and will be analysed as such by the commission.

As for last night’s notification of the state aid, the EC will have two months to react to the filing by the British Government, otherwise the aid will have been deemed to be cleared. The two-month deadline will however only commence when the notification has been judged complete and it is to be expected the commission may require more information before reaching a decision. 

As far as any assessment of rescue aid is concerned, there will be some pressure to get a decision out as soon as possible. However a decision on restucturing aid would take longer.

By Anne MacGregor

© MLex