Commission investigation into UK aid package for Northern Rock

02 April 2008

The Commission 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 decision also invites third parties to comment on whether the plan's proposals for avoiding undue distortions of competition are adequate.

 

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”, Commissioner Kroes said

 

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 17th March 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.

 

On 27 February 2008 the Commission opened state aid investigations concerning the state bail-outs of IKB and Sachsen LB in Germany. It is important to stress that the three cases each present important differences, reflecting the different operations of the institutions concerned and the way in which the conditions in the financial markets have therefore affected them.

 

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© Graham Bishop