Northern Rock Bailout by U.K. Faces Extended EU Probe

European Union regulators extended an in-depth investigation into U.K. aid to Northern Rock Plc as they review a modified restructuring plan for the mortgage lender.

The European Commission "needs to look into the changes made by the U.K. to the original package for Northern Rock, to ensure legal certainty," EU Competition Commissioner Neelie Kroes said in a statement today in Brussels. "In view of the large scale of the aid measures this is standard procedure."

The U.K. government plans to split "Northern Rock into a 'good' bank, which would continue commercial activities, and a 'bad' bank with most of the previous mortgage loans, which would be wound down," the EU said. The commission will study whether the changes will allow the bank to "return to long-term viability while avoiding undue distortions of competition."

Banks across Europe are preparing restructuring plans and the EU today announced a separate investigation of the German government’s 35 billion-euro rescue package for Hypo Real Estate Holding AG. Northern Rock needed emergency U.K. funding in 2007 and was nationalized in February 2008 after suffering the first run on a British bank for more than a century.

"This is a standard part of the application process and it was an announcement we have been expecting," said Brian Giles, a spokesman for Newcastle, England-based Northern Rock. "It is good news in terms of allowing us to progress with implementing our revised plan."

Under EU rules, banks need to submit restructuring plans six months after getting state subsidies. European banks needed the aid as the value of assets related to the U.S. mortgage market declined and inter-bank lending froze last year.

Credit-Crisis Casualty

"My understanding is that this is more a technicality reflecting the fact that there had been a change in Northern Rock’s business strategy," Michael Ellam, Prime Minister Gordon Brown’s spokesman, told reporters in London today.

Northern Rock, once the U.K.’s third-largest lender, suffered after the U.S. subprime-credit crisis began in 2007. The cost of borrowing rose and Northern Rock feared it would run out of cash.

The bank said April 23 that it will remain "substantially loss making" after mortgage arrears tripled in less than a year.

(Published by Bloomberg - May 7, 2009)