EU clears Northern Rock's break-up plan

By Foo Yun Chee

BRUSSELS (Reuters) - European Union antitrust regulators approved on Wednesday a British plan to break up state-owned mortgage bank Northern Rock, allowing the UK government eventually to sell parts of the lender.

The restructuring proposed by the British authorities is aimed at soothing EU competition concerns and returning the lender to long-term viability. Northern Rock, the first major UK victim of the credit crisis, was nationalised in early 2008.

The European Commission is reviewing a spate of bank bailouts across the 27-country EU, with many lenders expected to divest assets, close branches and cut market share in return for regulatory approval for state aid.

One prime example of regulatory-driven changes in European banking came on Monday as aided Dutch bancassurer ING said it would split its operations, leaving the firm's balance sheet 30 percent smaller than before its bailout.

"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," EU Competition Commissioner Neelie Kroes said in a statement.

"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," she said.

The Commission did not disclose when the break-up would take place but a source familiar with the situation told Reuters on Tuesday that this would be in early 2010.

The split will produce a "good" bank to hold retail deposits and provide new loans and a "bad" bank that will wind down the loan book. The "good" bank's balance sheet will be about 20 percent of the size of Northern Rock's prior to the crisis.