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Last Updated: Monday, 19 November 2007, 09:27 GMT
Treasury's Northern Rock statement
Alistair Darling
The chancellor is expected to make further comments later
Below is the full text of the statement released by the Treasury regarding Northern Rock:

Northern Rock has released a statement today on the indicative expressions of interest it has received covering a range of options for the business.

HM Treasury, on behalf of the Tripartite Authorities is today publishing a statement of principles which sets out how the Tripartite Authorities currently expect to approach proposals for the future of Northern Rock and its business, in particular considering the objectives against which the Tripartite Authorities expect to assess proposals received by Northern Rock.

As explained on 11 October, the Tripartite Authorities' objectives in relation to Northern Rock are to protect taxpayers; to promote financial stability; and to protect consumers. The specific objectives of the FSA are set out in Part I of the Financial Services and Markets Act 2000.

Also as set out on 11 October, the Bank of England has made available additional loan facilities to Northern Rock. These were introduced to allow time for the Company to consider the full range of strategic options open to it and to bring forward proposals for its future.

The principles clearly state that interested parties should not assume at this stage that the current Bank of England loan facilities will be available beyond either any sale or the expiry of the facilities in February.

However, the Authorities are willing to discuss any proposals made; any proposal that envisages an ongoing role for the Authorities, beyond their usual statutory and regulatory functions, will be evaluated on its merits against the Authorities' stated objectives.

Savers in Northern Rock can be reassured that their money is safe. The existing deposit guarantee arrangements announced by HM Treasury remain in place.

Northern Rock Tripartite Authorities' Statement of Principles for Assessing Proposals

1. Introduction

This statement sets out how the Tripartite Authorities (HM Treasury, The Bank of England and the Financial Services Authority) currently expect to approach proposals for the future of Northern Rock and its business, in particular considering the objectives against which the Tripartite Authorities expect to assess proposals received by Northern Rock.

2. Background

2.1 The existing deposit guarantee arrangements announced by HM Treasury remain in place.

2.2 The current strategic review in respect of Northern Rock is being managed by the company and its advisors. Northern Rock provided parties interested in participating in the restructuring process with a letter, together with a Briefing Memorandum, requesting submission of non-binding proposals by 16 November 2007.

2.3 The letter to interested parties noted that any transfer will, in practice, require the consent of the Tripartite Authorities and that the Tripartite Authorities would expect to undertake a detailed assessment of any proposals for the future of Northern Rock.

In undertaking this assessment, the Tripartite Authorities have taken and will continue to take actions in pursuit of wider public interest objectives. These actions, and the high level objectives underpinning these, have been set out in a series of statements through September and October.

As explained on 11 October, the Tripartite Authorities' objectives in relation to Northern Rock are:

(A) to protect taxpayers

(B) to promote financial stability; and

(C) to protect consumers.

2.4 The specific objectives of the FSA are set out in Part I of the Financial Services and Markets Act 2000. The additional facilities provided to Northern Rock by the Bank of England since 9 October 2007 have been advanced on behalf of HM Treasury and remain in place.

3. Objectives against which Authorities will assess proposals received

The Tripartite Authorities will assess proposals in light of the full range of strategic options available, including any proposals to meet Northern Rock's liabilities to the public sector without any change in ownership of its business or assets.

They will undertake this assessment with regard to the three objectives set out above, and additionally with regard to the timing and certainty of execution of any proposal.

3.1 Protection of taxpayers

The Government has made clear throughout the process that its objectives include protecting the taxpayer. This has two key elements:

(A) securing best value for money from public resources and ensuring that the public sector does not take on inappropriate risk; and

(B) affordability, assessed with respect to the fiscal rules.

Interested parties should not assume at this stage that the current Bank of England loan facilities will be available beyond either any sale or the expiry of the facilities in February.

However, the Authorities are willing to discuss any proposals made; any proposal that envisages an ongoing role for the Authorities, beyond their usual statutory and regulatory functions, will be evaluated on its merits against the Authorities' stated objectives.

The Authorities expect the costs and risks associated with Northern Rock to be borne to the greatest extent possible by the current and future private sector providers of capital. The allocation of costs and risks between any new investor or purchaser and Northern Rock's current providers of capital will be a matter for negotiation between the board of Northern Rock and the investor or purchaser.

Other things being equal, the Authorities will view favourably proposals that minimise any residual involvement or funding from the public sector.

Accordingly, the Authorities expect to assess:

(i) the way in which the existing guarantee arrangements provided by HM Treasury are proposed to be addressed so as to meet the key objective of protecting consumers, consistent with the need to ensure value for money and affordability for the UK taxpayer

(ii) the timing of repayment/amortisation of the Bank of England facility envisaged in any proposal, and any risks to such repayment/amortisation.

The Bank of England facilities, together with all other related liabilities such as those in respect of the guarantee arrangements, are secured against Northern Rock's assets.

Any successful proposal will respect the priority position of such facilities and liabilities.

HM Treasury will be prepared to provide limited factual confirmations relating to its own role, including limited factual confirmations in relation to the State Aid process, but does not expect that any successful proposal will include any representations, warranties or indemnities from any of the Tripartite Authorities to Northern Rock, any investor or purchaser or any debt or equity providers.

3.2 Promotion of financial stability

Any restructuring of Northern Rock would need to satisfy regulatory requirements in relation to the implementation of the transaction and on an ongoing basis. The Tripartite Authorities will assess proposals to ensure that:

(A) the continuing entity has a sustainable long term capital structure that meets the Tripartite Authorities' stability and policy objectives; and

(B) the business plan in respect of the continuing entity is viable in the medium term.

3.3 Protection of consumers

The existing deposit guarantee arrangements announced by HM Treasury remain in place.

The Authorities will view favourably any proposal which minimises disruption to the service provided to Northern Rock's customers and will expect proposals to include plans for communications with Northern Rock's customers.

3.4 Timing and certainty of execution of the Proposal

General

The Tripartite Authorities attach considerable importance to certainty of execution, and will assess proposals in relation to any pre-conditions, risks or approval requirements that could threaten execution within the envisaged timeframe and deal parameters.

Funding of proposals

The Tripartite Authorities expect the equity and debt commitments supporting any proposal to be obtained on a basis which ensures that the terms and conditions attaching to such commitments (including as to conditions to draw down and termination rights) maximise certainty of execution. This degree of certainty should be reflected in the terms of any proposal.

State Aid

European State Aid legislation relates to financial assistance that has the following key characteristics:

(A) It is granted by the State or through State resources;

(B) It favours certain undertakings, or the production of certain goods;

(C) It distorts or threatens to distort competition;

(D) It affects, or could affect, trade between Member States.

In practice, the Authorities consider it likely that any financial assistance involving public resources would need to be notified to and approved by the European Commission unless that assistance conformed with the market economy investor principle by being fully and demonstrably a commercial transaction (for example, lending pari passu with the private sector on a fully commercial basis).

The Authorities consider that the guarantee arrangements that have already been announced, together with the additional facilities announced on 9 October 2007, amount to State Aid, and will need to be approved by the European Commission.

State Aid rules would limit any ongoing public sector involvement even if it otherwise met the Tripartite Authorities' objectives.

Any ongoing State Aid measures beyond those currently in the course of notification to the European Commission would represent a potential risk to value and execution, because the European Commission may impose adverse conditions and may take additional time to approve such State Aid.

Proposals will be assessed against this backdrop, and should demonstrate how they have taken account of the State Aid rules in their development.

All other things being equal, any proposal will be viewed favourably in so far as it is not conditional upon European Commission approval of further aid measures.

This statement is not legally binding and shall not give rise to any legal liability; the Tripartite Authorities reserve the right to amend or withdraw this statement, in whole or in part, without notice and to act otherwise than in accordance with this statement.

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