The future of UK banks
• European commission ruled in favour of the restructuring plan for Northern Rock today
• Taxpayers to lend Northern Rock another £8bn
• Late drama as Tesco rules itself out of the bidding
Europe has given its approval to the break-up of Northern Rock into a Good Bank and a Bad Bank. Photograph: Press Association
9.45am:It's a red-letter for Britain's banking sector. Later this morning the European commission will reveal whether or not it will sanction the break-up of Northern Rock into a "good bank" and a "bad bank". It will also demand sweeping changes at both Lloyds and Royal Bank of Scotland (although that decision may be some weeks away). We'll be bringing you all the action throughout the day.
10.05am: We're expecting an announcement from Brussels around 11am. Jill Treanor has outlined how the EC's decision will herald the biggest shake-up in UK banking for decades. Both Lloyds and RBS are likely to have to sell hundreds of branches each.
But in a further twist, there are moves to halt the proposed sale of Northern Rock altogether. Instead, some senior figures within government want to turn the bank back into a mutual society.
Our political correspondent Allegra Stratton explains more here.
10.24am: Anticipation over the future of Northern Rock is particularly acute in Newcastle. Local newspaper The Journal is reporting that local MPs are hoping that any buyer promises not to move its operations out of the North East.
As Durham City MP Roberta Blackman-Woods put it:
It would surprise me if at the end of the day they agreed to sale on to a bidder who wasn't going to give some sort of guarantee. But it is really about securing the future of Northern Rock, which I think would be welcome.
More online here.
10.35am: Tesco is widely seen as a likely buyer of "Good Northern Rock" (assuming the EC gives the green light today), and may also be keen to buy branches from Lloyds and RBS if they are order to sell them. So what are we to make of the news today that it is creating 1,000 financial services jobs in, of all places, Newcastle?
Britain's biggest supermarket chain is beefing up its Tesco Bank operation with a new customer services office in Newcastle. Clearly the area has plenty of well-qualified staff - Northern Rock had to make hefty job cuts after being nationalised. But is there more to it?
We should know more soon, as my colleague Julia Finch is in Newcastle right now, interviewing Benny Higgins. He's the ex-RBS, ex-HBOS man who now runs Tesco's banking operations, so we'll be able to give you some insight into the supermarket group's ambitions when she's finished grilling him - and Tesco finance director Andrew Higginson - a bit later.
Incidentally, Benny Higgins is the man who was responsible for the halving of Halifax's market share in mortgages - from 16% to 8% - in 2006/7, thanks to his conservative sales strategy. At the time, this was thought to be disastrous, and it cost him his job at Halifax, but it looks pretty sensible now.
10.50am: The news is out! Early too. The European commission has ruled in favour of Britain's restructuring plan for Northern Rock - meaning the Good Bank/Bad Bank plan is approved.
In a statement, the commission said that the break-up will "restore the long-term viability of Northern Rock Good Bank".
More details soon....
11.02am: The full statement from the commission is now up on its website.
Neelie Kroes, Europe's competition commissioner, has explained why she decided that Northern Rock could be cleaned up and sold on without "unduly" disrupting competition:
"The failure of Northern Rock would have had major detrimental effects on the UK mortgage market and the overall financial stability of the UK economy. Important structural changes, including the split of the bank into two entities and a significant reduction of its market presence will allow the bank to become viable in the long-term and limit distortions of competition.
This decision demonstrates once again that the EU's state aid rules provide an appropriate framework to allow state support for a sustainable restructuring of banks without giving individual banks an unfair competitive advantage."
11.19am: The commission's ruling means the government can press on with its plan of injecting another £3bn into the Good Bank, which will have a mandate to lend £14bn by the end of 2010. The Bad Bank will be left to liquidate its assets over time - ideally as economic conditions improve.
But the Unite union has already urged the government to turn Good Northern Rock into a mutual society again (The Guardian revealed this morning that this is under active discussion within Downing Street)
Unite's national officer for financial services, Rob Macgregor, argues that the Rock could become the foundation for "a beacon for a new era of responsible financial services":
"Northern Rock should be re-mutualised and returned to the local community from where it came, there can be no back door deals to sell it to the highest bidder. Northern Rock's de-mutualisation a decade ago was a disaster. Establishing it as a Building Society would inject more competition into financial services and give the bank back to its customers."
Macgregor also demanded that any buyer protects jobs in the North East, and also compensates the taxpayer for the full cost of last year's bailout.
11.44am: Now this is very interesting. Northern Rock just issued a statement welcoming the commission's ruling. It also revealed that the government is lending it another £8bn to facilitate the break-up.
This money is going into the Bad Bank [called Northern Rock (Asset Management)] "in order to fund cash to be transferred to Northern Rock [Good Bank]. This relates to the transfer of the deposit book to Northern Rock [Good Bank] and will enable it to provide new mortgage lending."
By our calculations, this takes the taxpayer's loan to Northern Rock back up to the £27bn that we pumped in when the crisis first broke two years ago.
11.53am: Northern Rock press conference starts in about 10 mins - hope to get more info on that £8bn loan.....
12.08pm: Northern Rock's conference call has begun, led by Gary Hoffman, chief executive of the company.
He told journalists that the commission's decision is "good news for Northern Rock. It's an endorsement of what we've been doing, and our future plans."
Hoffman reiterates that while he will push on with breaking up Northern Rock, there is "no timetable" for a sale of the healthy part.
He also doesn't seem too keen on people using the term "Bad Bank" to describe Northern Rock (Asset Management) plc (where most of its existing loans will end up following the split.)
"Over 90% of the mortgages are performing.... They are not in arrears, these are good mortgages"."It's not a Bad Bank, but that will continue to be the accepted shorthand, and I understand why."
(Incidentally, the announcement from the commission uses the Good Bank/Bad Bank terminology, so that's good enough for me too)
12.13pm: Hoffman is concerned that people might think Northern Rock is receiving another £27bn of support from the government. He explains that the bank currently owes £15bn to the UK government. It's receiving another loan of £8bn (which I blogged on earlier), plus up to £3bn in fresh capital.
Bottom line - Northern Rock will owe the UK taxpayer £27bn again.
Russell Lynch of PA asks quite how long it will take to pay this money back. A decade?
"Yes, there or thereabouts" responds Hoffman.
12.16pm: Hoffman is quizzed about that extra £8bn loan. Does that indicate that it is about to write off billions of bad debts?
Hoffman declines to discuss the state of Northern Rock's mortgage book ahead of its third-quarter trading update (scheduled for next week).
"I'd rather leave it until next week until I talk about we are performing [on arrears]. You shouldn't extrapolate from the fact that 90% of the loans are performing that that we're going to write off the rest," he says.
The last time Northern Rock updated the City, it admitted that almost 40% of its borrowers were in negative equity.
12.25pm: My colleague Phillip Inman wants answers about the state of Northern Rock's deposits - an important factor if it is to increase its lending.
We'll have to wait until next week's trading update for answers on this too, but Hoffman does give a hint:
"As part of the agreement with the commission we have agreed to cap our retail deposits at £20bn...... At the half-year [the end of June], we had £19bn, so we're pretty close to the limit," Hoffman says.
He also reveals that there has been "no discussion" with the Treasury over the idea of remutualising Northern Rock rather than selling it.
"I think it would be very difficult to achieve. A mutualisation means giving or selling back to depositors, and I think it would be very difficult to do that," Hoffman says.
12.36pm: Hoffman has confirmed that he has been asked to be chief executive of both parts of Northern Rock once it is broken in two. He won't speculate on which part he'd rather run in the long term.
Dan Roberts, our head of business, questions the decision to lend Northern Rock another £8bn at a time when the wider economy is under such strain. Hoffman tries to bat this over to the Treasury, but promises to use the money well:
"We need to make sure that we are doing our bit for the government's objective of increased mortgage lending. It is commercially attractive to do new lending now, and it will help to build a viable business for Northern Rock which will be attractive in the future," Hoffman explained.
"There are clear restraints on what we will do. We should not be constricting the market, and we will not disrupt competition in what we do."
12.40pm: We're wrapping up now. Hoffman has pretty much ruled out running a sale process while the break-up is being carried out (so there's no chance of a deal soon). He also tries to assuage fears of more job cuts in Newcastle once a buyer is found.
"The heart and lungs of Northern Rock is in the North East, although we have great people across the country.....I'd find it hard to imagine that changing."
We finish on an optimistic note - today's news won't mean any staff cuts either.
1.14pm: Reaction to the Rock decision is rolling in. The Treasury have put out a statement welcoming it. You can read it here.
City minister Paul Myners said:
The Government's actions over the past two years to stabilise Northern Rock have protected the savings and deposits of hundreds of thousands of British families. Today's announcement is an important milestone for the bank and its staff.
Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, has confirmed that the move has implications for Britain's two partially nationalised banks:
There is almost certainly a read-across for RBS and Lloyds" from the Northern Rock decision. There is concern that the EC is likely to take a heavy hand when government aid has been involved. That has been weighing on their shares.
1.21pm: The Liberal Democrats have also responded. Vince Cable has urged the government not to leave taxpayers with "the scraps of Northern Rock" by rushing through a sale before the next general election.
While the EU is right that there should be greater competition in the financial sector, splitting Northern Rock into 'good' and 'bad' banks risks leaving the taxpayer with the scraps while the private sector gets the prime cuts.It should only be sold when market conditions are right and the taxpayer gets a good return on their investment.
1.26pm: Even though an early sale looks unlikely, there are some interesting candidates in the running to buy Good Northern Rock.
This includes Richard Branson, who was thwarted nearly two years ago when he tried to take over the bank. One reason for his failure was that the government did not believe he had a sufficiently experienced team to handle the crisis.
Last week, though, Virgin Money applied for a banking licence. It also revealed that it is hoping to appoint Bryan Sanderson, who was parachuted into Northern Rock after its collapse.
City analysts see this as a clear attempt by Virgin to bolster its credentials in case it does get involved in another bidding war.
1.38pm: More banking developments. The government just appointed Robin Budenberg as the new chief executive of UKFI - the body which oversees the state's holdings in Lloyds, Royal Bank of Scotland, Bradford & Bingley.....
Budenberg will replace John Kingham "following an appropriate handover period". No mention of how much we'll be paying the former UBS banker.
As Jill Treanor reported last night, Alistair Darling has been worried about the ramifications of appointing a City figure to such a delicate role.
2.14pm: More reaction to today's developments. Dan Roberts is questioning the "bizarre decision" to inject another £8bn of lending into Northern Rock to get the housing market moving again:
Whereas it might have made sense for the state to act as lender of last resort when house prices were in freefall, it is hard to see the logic when even the official figures are showing a rising market.
Dan also joins Aditya Chakrabortty, Larry Elliott and Michael White in today's edition of our podcast, The Business, to hammer out this and other issues.
6.00pm: After something of a haitus (while everyone digests the details), we have fresh news. Tesco is ruling itself out buying Northern Rock - despite today's announcement of 1,000 new jobs in Newcastle.
Julia Finch, who travelled to the North East today to interview two top Tesco Bank executives, reports that Tesco has looked at buying Northern Rock but has decided against making an offer.
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