EU approves Northern Rock split

The EU Commission has approved plans to split nationalised Northern Rock into a good bank and a bad bank. 

The restructure will allow £50 billion of mortgages and £30 billion of unsecured loans and Treasury assets to be held in AssetCo while Rock's £20 billion retail deposits and branch network would become known as BankCo. 

This good bank can ultimately be sold off for as much as £1.5 billion while the bad bank remains in state hands.

EU Commissioner Neelie Kroes said that the split "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," Ms Kroes added.

Media reports suggest that senior UBS banker Robin Budenburg is set to be named as the new boss of UK Financial Investments which would oversee the split and the sale. 

Chancellor Alistair Darling will make a decision on John Kingman's successor later today.

The long-awaited move has raised hopes that a partial sale of the business could go through before the general election next year with the split expected to be complete by the end of the year.

Under the current plans Rock has agreed to keep its share of retail deposit balances at less than 1.5% and to limit its share of gross mortgage lending to under 2.5% a year. Brussels will also stipulate more restrictions at a later point.

The Government is also considering turning Rock into a building society although this option has less public support.
A sale would help repay some of the £27 billion loan the government has injected into Rock since its collapse in 2007.

Most of this sum has already been repaid with the outstanding amount in line to be paid off by 2010.

Potential buyers of the "good" bank are rumoured to include Virgin and National Australia Bank - owner of the Clydesdale and Yorkshire Bank.

David Buik of BGC Partners says: "It is obviously the intention of the government to sell off branches from RBS, Lloyds, Northern Rock and Bradford & Bingley to new kids on the block.  Tesco is an obvious choice and would be popular."

The big five high street banks will be forbidden from bidding in an attempt to introduce more competition into the sector.

Plans to break-up Royal Bank of Scotland (RBS) and Lloyds Banking Group (LLOY) are expected to follow in a matter of weeks. Lloyds, which is 43% owned by the taxpayer, could be ordered by Brussels to reduce its share of the banking market from 30% to 25%.

RBS meanwhile is working on plans to sell off several hundred branches.