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Restoring Northern Rock to strength

24 February 2010

On 24 February 2010 an important milestone was reached in Northern Rock’s return to independent commercial strength with notice given for the end of the special guarantee for the bank’s retail deposits.

The Financial Services Secretary to the Treasury, Lord Myners, announced that these guarantees will be lifted, effective 24 May 2010. Fixed term deposits in existing accounts will be guaranteed to maturity.

The removal of retail guarantees follows the restructuring of Northern Rock that took place on 1 January 2010 following a Transfer Order made on 8 December 2009. The restructuring strengthened Northern Rock’s capital position, enabling the bank to return to the mortgage market and support the economic recovery as proposed by the Government in February 2009. The restructuring resulted in two separate companies, with the back book of mortgages managed separately to Northern Rock’s other business. A healthy new Northern Rock now offers savings and mortgage products, increasing competition in the sector and providing consumers with more choice.

As a result of the Transfer Order, Government guarantees in relation to Northern Rock were restated to apply to the two entities.

The proposed restructuring of Northern Rock received approval from the European Commission on 28 October 2009.

On 28th October 2009 the Government welcomed the European Commission’s (EC) approval of the legal and capital restructure of Northern Rock. The restructure will strengthen Northern Rock’s capital position and enable the bank to return to the mortgage market and support the economic recovery as by proposed by the Government in February. Under the restructure, the back book of mortgages will be managed separately to Northern Rock’s other businesses.

Background

In late summer 2007, Northern Rock was affected by heightened turbulence in the financial markets that impacted the banks ability to fund its operations. In response, the Government took action to maintain financial stability and to safeguard depositors’ money.

In February 2008, after exploring a range of options, the Government made the decision to introduce legislation to take Northern Rock into a period of temporary public ownership. On 22 February 2008 an Order to transfer the bank's shares was placed in Parliament.

The Government has continued to work to support Northern Rock, with the eventual aim of restoring the bank to financial viability and returning it to the private sector.

In March 2008, Northern Rock published its business plan with a goal of contracting the company into a smaller, sustainable business to be returned to the private sector as soon as possible.

In August 2008 the Government announced that it would provide up to £3bn to strengthen Northern Rock’s capital base.

In February 2009, consistent with its aims to address a lack of mortgage lending capacity and ensure a well functioning mortgage market, the Government announced that Northern Rock would undertake increased levels of new lending. To enable Northern Rock to focus on new lending, the company would be restructured so that the back book of mortgages is managed separately to its other business.

In accordance with EU state aid rules, a restructuring plan was submitted to the European Commission in March 2009, reflecting the revised business strategy. EC approval was received in October 2009.

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