Constraints on Northern Rock do not go far enough, says BSA

Constraints on Northern Rock do not go far enough, says BSA

Constraints on Northern Rock do not go far enough, says BSA

Commenting on today’s decision by the European Commission (EC) to approve the split of Northern Rock into a ‘good’ bank and a ‘bad’ bank, Adrian Coles, Director-General of the Building Societies Association, said:

“The EC states that splitting Northern Rock will not unduly distort competition; however, we don’t believe that the new competitive framework surrounding Northern Rock goes far enough to ensure this.

“Given the split, the 100% Government guarantee on Northern Rock’s retail deposits should now be removed. Until this happens, we strongly believe that Northern Rock should pay a fee to the Government for the benefit of this guarantee.

“The commitment to stay out of the Moneyfacts top three best-buys for mortgages is a step in the right direction. However we’d have hoped for a commitment to stay out of the top five.

“We note the restriction to the size of the savings book. This is welcome as far as it goes. Unfortunately, previous targets set by Northern Rock were met well ahead of planned dates suggesting short-term distortion to the market can take place within a long-term commitment.

“In the longer term, we believe there is a strong case for returning Northern Rock to the mutual sector, thus encouraging diversity, competition and a more prudent approach to business than might otherwise be achieved.”

~ Ends ~

Notes to Editors:

1. The BSA’s full submission on Northern Rock to the European Commission, submitted in July 2009, can be viewed on our website here http://www.bsa.org.uk/policy/response/nr_ec_submission.htm
The key points include:
¿ BankCo (‘good’ bank) should be required to pay an annual premium to the Government to cover part of the cost of the protection it has gained from the establishment of AssetCo (‘bad’ bank).
¿ The explicit Government guarantee covering retail and wholesale deposits should be removed, as this allows BankCo to obtain a lower cost of funding than its competitors. Alternatively, if this cannot be achieved, BankCo should be required to pay for the guarantees at a price commensurate to that under the UK Governments Credit Guarantee Scheme.
¿ The OFT should resume independent scrutiny of Northern Rock and its effect on competition in the UK mortgage and savings markets.
¿ If the advantageous position granted to BankCo by the restructure of Northern Rock and the explicit Government guarantees cannot be fully addressed by the above measures, more direct controls on BankCo’s activities might be necessary:
* BankCo should be required to make a substantial proportion of its new lending in segments of the mortgage market where private sector
lenders are not currently lending, such as at high LTV ratios, or
specifically to first-time buyers.
* In areas of the mortgage market where BankCo is competing with a number of private sector lenders its price competitiveness should be limited, possibly by staying out of best buy tables for mortgage products.
* Until the explicit guarantee covering retail deposits is removed, Northern Rock should be required to stay out of the top five savings accounts in best buy tables.

2. Converting failed financial institutions into mutual organisations – A report published for the BSA by the Centre for Mutual and Employee-owned Business at the University of Oxford can be viewed of the BSA website here http://www.bsa.org.uk/docs/presspdfs/remutualisation.pdf. The report reveals a strong case for converting failed banks into mutual organisations. In light of the report, the BSA urges the Government to consider seriously returning Northern Rock bank to the mutual sector.

3. The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 52 UK building societies.
Building societies have total assets of over £370 billion and, together with their subsidiaries, hold residential mortgages of over £245 billion, more than 20% of the total outstanding in the UK. Societies hold nearly £240 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 36% of all cash ISA balances. Building societies employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

4. Photographs of Adrian Coles are available from the BSA press office, or from the Association’s website at www.bsa.org.uk or Headlinemoney www.headlinemoney.co.uk