European competition watchdogs agreed yesterday that Northern Rock could be split into a "good bank" and a "bad bank" – but British taxpayers will have to inject a further £8bn to achieve the separation. The Rock's chief executive, Gary Hoffman, also admitted that it could take 10 years for all the state support to be paid back.
In a separate development, Robin Budenberg, a senior banker at UBS, was appointed to manage the sell-off in his new role as chief executive of UK Financial Investments, the body which supervises the Treasury's stakes in Britain's bailed-out banks.
As part of the deal agreed with EU regulators, Northern Rock will be required to limit its lending to £4bn this year, £9bn next year and £8bn in 2011. Deposits will also be capped at £20bn until 2011, and the bank will not be allowed a top-three ranking in Moneyfacts mortgage categories for two-, three- or five-year fixed or variable mortgages before the end of 2011.
In return for this, Northern Rock – which has already received £15bn of taxpayers' money – will have a further £8bn injected by the Treasury. It will be able to call on a further £4bn of "stand-by" liquidity capital, bringing the state's total dowry to £27bn.
All of this debt will be held by Northern Rock Asset Management, the "bad bank". It will consist of up to £60bn of mortgages, including the controversial 125 per cent loan-to-value "Together" products, and those linked to various securitisation vehicles and bonds.
Northern Rock insisted that 90 per cent of these were still "performing" but the 10 per cent that are not add up to a hefty potential bill for the public purse. The "good bank" will contain £19bn of deposits, £8bn of cash and £10bn of low-risk mortgages.
The EU competition commissioner, Neelie Kroes, said yesterday: "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."
Gary Hoffman, the former boss of Barclaycard, will continue to run both halves of the bank, at least until the sell-off. While new non-executive directors are being sought to join the boards of the two bank divisions after the split, that will probably raise eyebrows among corporate governance watchdogs. Mr Hoffman said: "For the time being, I will be chief executive of both and I will do the job for as long as it takes in the interests of our clients. We have achieved a lot here."
He declined to comment on any preliminary discussions he might have had about the sale, which will kick off in earnest next year when the split is finalised. Virgin, Tesco, Banco Santander, National Australia Bank and private equity funds are all seen as likely bidders. The Government wants to see three new competitive banks created from Northern Rock and parts of Lloyds and Royal Bank of Scotland, which the EU will demand as a result of their bailouts.
Richard Lambert, the director- general of the Confederation of British Industry, said: "We welcome today's EC decision. When parts of Northern Rock come to be sold, this must be done in a way that delivers a good deal for the taxpayer and leads to greater competition in the UK banking sector."
But Vince Cable, the Liberal Democrat treasury spokesman, said: "The Government should resist the temptation to use Northern Rock for its own political ends by selling it off before the general election. While the EU is right that there should be greater competition in the financial sector, splitting Northern Rock into 'good' and 'bad' banks risks leaving the taxpayer with the scraps."
The sale plan was also criticised by building societies and the Unite union, which represents financial workers. They believe the Rock should be "remutualised" and owned by its savers and borrowers. Adrian Coles, of the Building Societies Association, said he was concerned that the restrictions on Northern Rock's lending did not go far enough and it should pay a fee for the Government backing its deposits.
Suitors lining up to make offers
After trying to bid for Northern Rock before its near-collapse and subsequent nationalisation, Virgin is in talks with Bryan Sanderson, who was parachuted into the bank following the departure of Matthew Ridley with a brief to find a future for the business. Virgin has relevant experience and its Virgin Direct brand shook up the life insurance market in the late 1990s although it later fell away.
Verdict: Has made little secret of its interest and is the marginal favourite to take over the Rock.
Vying for favouritism with Virgin. Sir Terry Leahy has said Tesco wants to offer full banking services including current accounts. Made a real noise yesterday by opening a customer service centre in Northern Rock's Newcastle heartland that will create 1,000 new jobs.
Verdict: Lord Mandelson was cooing about those jobs yesterday. Rivals Virgin as a favourite.
Growing fast in the UK and now a genuine global player under the leadership of Emilio Botin. Already has Abbey, Alliance & Leicester and parts of Bradford & Bingley in its portfolio. However, it posted a third-quarter profit yesterday of €2.2bn (£1.9bn) – about the same as a year ago. Profits were up 58 per cent at £1.2bn and Abbey is gobbling up market share, but nonetheless Santander's shares took a beating.
Verdict: It is a contender but simply bolting on Northern Rock will not enhance competition in UK banking, which could scupper its chances.
National Australia Bank
Australia's economy is faring well but NAB fell into the red in the first half with its first loss since 2000. Its net loss of A$75m in the six months to 30 September compared with a profit of A$1.85bn over the same period last year. NAB, which own the Yorkshire and Clydesdale banks in Britain, could be a viable contender and has fewer competition worries than Santander
Verdict: A contender if others fail.Reuse content