Page last updated at 14:16 GMT, Monday, 17 August 2009 15:16 UK

Mutuals oppose Northern Rock plan

Man passes a Northern Rock branch
The Northern Rock has been keen to attract new customers

The Building Societies Association (BSA) has opposed the UK government's plan to split the nationalised Northern Rock bank into two parts.

The government wants to separate the bank's lending operations from its past loans and bad debts.

The BSA says if the lender is reorganised this way it will have an unfair advantage over its rivals.

The criticism is contained in a submission to the European Commission which is scrutinising the plans.

The BSA says the government's guarantee to the Northern Rock's savers, which came into place when it faced a run on its funds in 2007, should also come to an end.

In its submission to the EU on 31 July, the BSA argued that splitting the Northern Rock into a good bank (BankCo), and a bad bank (AssetCo) holding most of the Rock's old mortgages, would put building societies at a big disadvantage.

"The proposed BankCo firm will have a very strong position in the mortgage market, as its initial balance sheet has no or few non-performing loans," the BSA said.

"BankCo is likely to be able to lend freely, without having to absorb losses from any non-performing loans, unlike all of its competitors in the UK mortgage market, to varying degrees," it said.

Limitations

The Newcastle-based bank was nationalised in early 2008 after becoming the first victim in the UK of the developing credit crunch.

The European Commission will rule this autumn on whether or not the UK government's plans for the bank break its rules on unfair state aid.

To stop the revitalised Northern Rock having an unfair advantage, the BSA asked the European Commission to impose some restrictions on a separate BankCo.

It said:

• the lender should pay an annual levy to the government for having its bad debts hived off to the AssetCo

• the UK government's guarantee to retail and wholesale savers should be removed, as it allows Northern Rock to borrow at a cheaper cost than its rivals

• alternatively BankCo should be charged an insurance premium for the continuing government support

• BankCo should have formal limits imposed on its lending to stop it being too competitive with other lenders.

The Northern Rock still owes the UK government nearly £11bn.

It is also still making huge losses because of continued write-offs of potential bad debts due to some of its mortgage borrowers defaulting on their loans.

A year ago the bank was encouraging as many borrowers as possible to leave and redeem their loans, so it could use the money repaid to it to, in turn, repay the government.

This year the Rock has started to expand its lending again, and is now offering re-mortgage deals to some of its more credit-worthy borrowers, rather than concentrating exclusively on attracting new customers.



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