The European Commission has launched an inquiry into the UK Government's support for Northern Rock to ensure that the nationalised bank does not have an unfair advantage over rivals.
The inquiry, announced yesterday, is to ensure that the Government's funding and guarantees of wholesale and retail deposits do not damage competition. A number of UK banks have raised concerns about a state-owned bank competing for highly prized deposits when lenders are starved of funding.
Neelie Kroes, the competition commissioner, said: "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 distorting competition."
The commission said it wanted more details of the Government's plan and invited other parties to comment on whether the proposals ensured fair competition. The commission said it had received a number of complaints about the Government's support but would not say from where.
A protest from Danish banks resulted in Northern Rock closing its online Danish savings business last month. The British Bankers' Association said it was not aware of a complaint by a UK bank. Northern Rock also operates in Ireland and Guernsey.
Mike Pullen, a partner at the law firm DLA Piper, said: "Northern Rock and the Government will have to fight a pitched battle to defend themselves against the investigation. There is only one solution for illegal state aid – you have got to give the money back."
The Treasury said it was confident that the restructuring plan would meet the commission's requirements. "Such investigations are routine in cases of this scale, providing the opportunity for the member state and other interested parties to comment on the proposals," a spokesman added.
The commission said it would be highly unusual if it did not investigate state support on the scale of Northern Rock's. But a spokesman added that the probe would be "proper and thorough" and by no means routine.
Ron Sandler, Northern Rock's chairman, aims to halve the size of the bank's balance sheet and double retail deposits to about £20bn in 2011 to reduce dependence on wholesale markets.
Mr Sandler aims to repay the Bank of England its £24bn of loans during 2010 and to relinquish the Government's guarantees the next year so that the bank can be returned to the private sector.Reuse content