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Mutuals object to Northern Rock revamp

Source: Reuters - Tue 18th Aug 2009

The body representing mutually-owned lenders has complained to Europe's anti-trust regulator that a planned restructuring of state-owned bank Northern Rock would distort competition in the mortgage market.

The Building Societies Association (BSA) has told the European Commission that Northern Rock should be made to pay financial penalties to maintain a level playing field if the proposed overhaul goes ahead, a BSA spokeswoman said on Monday.

The Commission is currently scrutinising the restructuring plan to make sure it does not breach European state aid rules, and is due to deliver its verdict in the autumn.

A negative verdict would mark a setback to the British government's efforts to restore Northern Rock to financial health and sell it back into private ownership.

Under the restructuring plan, Northern Rock is expected to split itself into two entities an operating company comprising the bank's deposits and lending activities, and an asset company containing its mortgage book, which has been hit by a rise in bad debts as the recession takes its toll on borrowers.

In a report delivered to the Commission last month, the BSA said allowing Northern Rock to lend without the burden of bad loans would give it an unfair advantage over its competitors.

It said the bank should be made to pay an "annual premium" to the government to cover the cost of setting up the asset company.

The BSA also called for the removal of the government's guarantee on Northern Rock's retail and wholesale deposits, which it said allows the bank to obtain cheaper funding than its rivals.

"(The plans) cause a number of concerns for building societies relating to the potential distortion of competition in the UK mortgage and savings markets" the BSA said. 

Northern Rock became the first major British casualty of the credit crunch in September 2007 after rising wholesale borrowing costs left it unable to fund itself.

The bank, kept afloat by government loans, was nationalised in February 2008 after efforts to find a private sector buyer for the group fell through.

The BSA represents 52 customer-owned lenders with combined assets of 375 billion pounds. They include mutually-owned Nationwide, the country's third-biggest mortgage provider.

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