As expected, the European Commission has approved plans to split Northern Rock in two, the first step to repaying the tax payer and a return to private ownership.
The move should not affect borrowers or savers in the bank but will see significant changes in the lenders makeup.
The split is expected to be completed this year, and will see the lender replaced with what is being termed a “good bank (Northern Rock plc) and a “bad bank (Northern Rock Asset Management plc).
The good bank will include all customer savings accounts, and some existing mortgages. It will offer new savings and mortgage deals and will aim to lend £9 billion next year. It is hoped that Northern Rock plc will eventually be returned to private ownership with the proceeds used to repay the taxpayer.
Savers will continue to benefit from the government guarantee on their savings, although this will be reviewed following the split. Any decision to remove the guarantee is subject to a minimum three month notice period, with fixed rate bond holders retaining the guarantee for the bond term.
Restrictions will apply to the structure of new mortgage deals, lending amounts and the amount of deposits the bank can hold. However, any mortgages where the customer can borrow more than 80% of the value of the property, or those exclusively for first time buyers will not be subject to competitive restrictions, which could provide a welcome boost for those areas of the market.
Northern Rock Asset Management will take the balance of existing mortgages, all unsecured loans and the balance of the government loan but will not offer any new loans. Once separated, it is expected that those assets will be run down, with the proceeds repaying the outstanding government debt.
So far, Northern Rock has repaid £12.5bn of the £26.9bn lent by the government, although as part of the restructure, the government will lend an additional £8bn.
The European Commission said it did not know when it would be taking a decision about the future structure of Lloyds and Royal Bank of Scotland.