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Economy

EU clears Northern Rock rescue

Wednesday, 05 December 2007

The European Commission has authorised the UK authorities' package of measures to support Northern Rock.

The Commission concluded that the measures comply with EU rules on rescue aid. The approval of the rescue aid measures has no bearing on whether any future measures taken by the UK authorities to support a restructuring plan would be similarly approved.

Any such measures would have to be assessed on their own merits according to the rules on restructuring aid to establish whether aid was involved, and if so whether there was sufficient restructuring to offset any distortion of competition caused by the aid and to ensure the future viability of the company without further state aid.

EU Competition Commissioner Neelie Kroes said, "This case shows that, with good cooperation from the Member State concerned, the Commission can move very fast to provide legal certainty for temporary rescue measures. I look forward to continuing to work closely with the UK authorities during any discussions on the future restructuring of Northern Rock."

Secured by sufficient collateral

Northern Rock plc, based in Newcastle-upon-Tyne, is the UK's fifth largest UK mortgage bank with a balance-sheet total of more than £100 billion. Northern Rock's core activity is residential mortgage lending, which represents more than 90 per cent of all outstanding loans made by the bank.

On 26th November 2007, following intensive contacts between the UK authorities and the Commission, the UK communicated the details of the measures taken.

The Commission said it had studied these carefully and concluded that the emergency liquidity assistance provided by the Bank of England on 14 September 2007, which was secured by sufficient collateral and was interest-bearing, does not constitute state aid.

It added that the guarantee on deposits granted by the Treasury on 17 September, however, as well as the measures granted on 9 October, which provided further liquidity and guarantees to Northern Rock and were secured by a Treasury indemnity, do constitute state aid.

Loans or guarantees

“These aid measures can be authorised as rescue aid in line with the Community Guidelines on state aid for rescuing and restructuring firms in difficulty,” the Commission said in a statement.

Under these rules, rescue aid must be given in the form of loans or guarantees lasting no more than six months, although there are certain exceptions to these rules in the banking sector.

The UK authorities have given a commitment to deliver to the Commission by 17 March 2008 a plan for Northern Rock going beyond the short term rescue. The Commission said that if a restructuring plan were to involve state aid, it would have to be assessed on its own merits under the rules on restructuring aid.

As a consequence of the ongoing turbulence in the world’s financial markets, a significant rationing of funds in the sterling money markets occurred in August and September 2007 and the mortgage securitisation market virtually closed. This created severe liquidity difficulties for Northern Rock whose business model is particularly reliant on frequently raising finance in these markets.

Emergency liquidity assistance

When Northern Rock was unable to meet its funding needs it requested the support of the Bank of England for emergency liquidity assistance pending a longer term solution for its current difficulties.

On 14 September the Bank of England granted emergency liquidity assistance to Northern Rock against sufficient collateral and a penal interest rate.

The difficulties of Northern Rock were further aggravated by a bank-run, which started after the news on the Bank of England granting support to Northern Rock was made public.

In order to stop the bank run and to avoid contagious effects leading to a wider banking crisis, the UK Treasury announced guarantee arrangements for all existing accounts in Northern Rock on 17 September 2007.

On 9 October 2007, the Treasury extended the guarantee to new retail deposits and, together with the Bank of England, modified the terms and conditions of the emergency liquidity assistance, losses from which were from that date also covered by a Treasury indemnity.

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