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October 29, 2009

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EU approves UK plan to split off a 'bad bank'

THE European Union yesterday approved the British government's plan to split off a "bad bank" to take over shaky assets from bailed-out lender Northern Rock.

It also approved the government rescue and nationalization of the mortgage lender, the first British bank to fall victim to the global financial crisis.

The spinoff of a "bad bank" is a way of handling assets that would otherwise compromise the survival of the "good bank."

EU Commissioner Neelie Kroes said the restructuring "will allow the bank to become viable in the long term and limit distortions of competition."

Northern Rock Plc saw the first run on a British bank since 1866 when its wholesale borrowing dried up during a credit crunch that saw customers lining up to withdraw their cash in September 2007.

The government gave Northern Rock 27 billion pounds (US$44.05 billion) in loans and assumed contingent liabilities of 29 billion pounds in an effort to keep it afloat, before nationalizing it on February 22, 2008.

"The failure of Northern Rock would have had major detrimental effects on the UK mortgage market," said Kroes.

The Commission said in a statement it was "satisfied that the package of measures, including the split, will restore the long-term viability of the 'good' bank and will allow orderly liquidation of the 'bad' bank, without unduly distorting competition."




 

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