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The European Commission has approved under EC Treaty state aid rules a package of measures to support the restructuring of UK mortgage bank Northern Rock. The bank will be split into a 'good' bank that will continue the economic activities of Northern Rock and a 'bad' bank, an asset management company which will run down the remaining assets.
Competition Commissioner Neelie Kroes said "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. 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."
The Commission’s investigation found that the aid package in the UK's revised restructuring plan was kept to a necessary minimum. The UK Government financial support includes recapitalisation measures of up to GBP 3 billion, liquidity measures of up to GBP 27 billion and guarantees covering several billions of pounds of liabilities.
The Commission also concluded that the restructuring is capable of restoring the 'good' bank's long-term viability as it will have only limited exposure to Northern Rock's risky past lending. It will, therefore, be able to operate without state support in the long-term and will be eventually sold to a third party. Moreover, the aid package will enable the 'good' bank to continue to provide lending to the real economy. The restructuring measures will correct the excessive expansion of Northern Rock pre-crisis and its market share will be less than half of the pre-crisis level. This limits competition distortions in the UK market created by the economic advantage the bank received through state support. Conversely, the 'bad' bank (the asset management company) will run down the past loans over a longer period of time and eventually be liquidated.