FINANCE - EUROPE

EC investigates Northern Rock bailout

2 min

The European Commission said Wednesday it had launched an in-depth, state aid investigation into British authorities' bailout of the recently nationalised British bank Northern Rock.

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The European Commission said Wednesday it had launched an in-depth state-aid investigation into British authorities' bailout of the recently nationalised British bank Northern Rock.

"The commission needs to open a formal investigation into UK measures to restructure Northern Rock to ensure legal certainty," EU Competition Commissioner Neelie Kroes said in a statement.

"I look forward to continuing to work closely with the UK authorities and other parties during our investigation," she added.

The bank was nationalised in February after the government could not find a buyer from the private sector.

Northern was brought to the brink of collapse last year when it failed to raise sufficient funds, as banks toughened their lending conditions amid uncertainty over the sector's exposure to a meltdown in the US subprime or high-risk home loan sector.

The European Commission is responsible for policing state aid in Europe to make sure that it does not give companies an unfair advantage and distort competition.

It said that its investigation would give "interested parties the possibility to comment on the proposed measures but it does not prejudge the outcome."

The commission already approved in December rescue aid for Northern Rock on condition that the support lasted no longer than six months and was aimed at keeping the bank afloat.

For state aid over six months, under EU rules the support must be targetted at restoring the long-term viability of a company through a restructuring and not distort competition.

As the first six-month state aid period expired in March, British authorities informed the commission about their restructuring plans for Northern Rock in order to meet EU rules.

The commission said the British authorities' plans called for Northern Rock to rein in its lending and its balance sheet and repay loans from the Bank of England while British government guarantees would be gradually phased out.

At the same time, the bank would need to rebuild its retail deposit base in order to obtain funding.

However, the commission said London still needed to provide further information about the bailout so that it could see if the measures were in line with EU state aid rules.
  

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