EU backs split of Britain's Northern Rock bank

(BRUSSELS) - EU competition regulators approved Wednesday the state aid contained in plans to break up and sell British nationalised bank Northern Rock in the wake of the global financial crisis.

"Following an in-depth investigation ... the commission has concluded that the aid is compatible with the EU rules on state aid," said a statement from the European Commission, which polices competition for the 27-nation bloc.

The British government's aid includes recapitalisation measures of up to three billion pounds (4.43 billion euros), liquidity measures of up to 27 billion pounds and guarantees for liabilities of several billion pounds.

Under the plan bringing Northern Rock back from the brink of collapse, the bank will be split into a "good bank" that will continue its economic activities, and a "bad bank" management company to run down the remaining assets.

The commission said it was satisfied that the "measures, including the split, will restore the long-term viability of the 'good' bank and will allow orderly liquidation of the 'bad' bank, without unduly distorting competition."

Its ruling comes after Dutch banking and insurance group ING said it would restructure, under pressure from the EU regulator, selling off its insurance operations and raising money to pay back emergency state funds.

"The government has today welcomed the European Commission's approval of the legal and capital restructure of Northern Rock," a British Treasury statement said.

"The restructure will strengthen Northern Rock's capital position and enable the bank to return to the mortgage market and support the economic recovery as proposed by the government in February," it said.

"Under the restructure, the back book of mortgages will be managed separately to Northern Rock's other businesses."

According to Britain's Daily Telegraph newspaper, the sale of Northern Rock's "good" assets as early as next year will be handled by UK Financial Investments which manages government holdings in British banks.

Virgin Money and National Australia Bank, owner of Clydesdale and Yorkshire banks, were named in media reports Wednesday as possible buyers.

The Independent daily said that state-rescued Royal Bank of Scotland and Lloyds Banking Group will also be partially sold off in coming years in government-backed plans to create more competition in the market.

The three British banks received huge government bailouts at the height of the global economic crisis but regulatory authorities are concerned about such state-backed banks having an unfair advantage over those that were not helped.

Northern Rock, once Britain's fifth-biggest home loan provider, faced potential collapse in September 2007 as banks tightened lending criteria amid uncertainty over exposure to the failing US subprime home loan sector.

The troubled group was forced to request emergency funding from the Bank of England -- which sparked the first run on a British bank for more than a century.

EU Competition Commissioner Neelie Kroes said the proposed changes "will allow the bank to become viable in the long-term and limit distortions of competition."

Lloyds is expected to face a forced reduction in its share of the retail banking market from 30 percent to 25 percent, with the disposal of more than a seventh of its 3,000 branches, according to the Independent.

Lloyds, which is 43-percent owned by the taxpayer, has reportedly been trying to raise capital to keep it out of the government's insurance scheme for toxic assets.

RBS, which is 70 percent owned by the taxpayer after it was saved from collapse by a government bailout last year, is working on plans to sell off several hundred branches, the newspaper said.