The EU Competition Commissions’ decision to approve the UK government break-up of Northern Rock into a ‘good’ and ‘bad’ bank is likely to leave fewer scars than initially thought. Maybe in the short-term yes but in the long-term the UK taxpayer will be left with the left-overs. Is it fair for the taxpayer to be left with the costs of risky lending practices?
Bailing-out Northern Rock in 2007 was a good decision from the UK government as its failure would have caused greater instability in the UK mortgage market and the economy. However, splitting the bank in 2009 still has its consequences. These questions need to be answered: Will the split create more competition? Will the customers in the ‘bad’ bank be disadvantaged? How much more will the UK taxpayer need to pay?
The split allows for the ‘good’ bank to be bought by new entrants into the banking sector such as the Virgin Money, Tesco or private equity groups. The new bank will hold all of Northern Rock’s retail deposits and a portion of its low-risk mortgages and is subject to several EU constraints. According to the Times “The bank will have to limit new lending to £4bn this year…it will also have to ensure its retail deposit balance does not exceed £20bn”. The constraints will be a deterrent to any new buyer. It will increase the number of banks in the industry but I think the new bank will still need to be very competitive to break the market dominance of established banks like Lloyds TSB and Barclays. Limits are not a good way to increase competition.
The ‘bad’ bank will then hold the remaining mortgage assets and remain under government control. The issue, according to the Mail is that four in five Northern Rock borrowers will be consigned to the ‘bad’ bank which will eventually be privatised. Are they going to face higher interest rates and uncertainty with their mortgages? The future for those customers is uncertain but I fear the worse. It is highly likely that any new owners will adjust the price of their products to maintain the viability of their business and ignore public demands.
What is certain is that the UK taxpayer is likely to make a loss from the restructuring and will be left with a bank with toxic assets in the long-term. The sale of the ‘good’ bank is also a highly politically sensitive topic as the Brown Government is likely to sell in a fire-sale that would not likely maximise value to the shareholder or taxpayer. The UK government is also injecting another £8bn into Northern Rock to fund the break-up making a total debt of £27bn to the state. The bail-out has cost the government and the taxpayer billions of pounds but it is necessary to allow the banking sector be rid of government control.
But I feel the involvement of the EU Competition Commission has created more problems for the UK banking sector. In the short-term it forces governments to sell valuable assets to new entrants at a cheap price, leaving toxic assets for the taxpayer in the long-term. The taxpayer has got the raw bargain.
In the Press this week:
The Financial Times reported the story with objectivity and with sourced information from the EU Competition Commissioner Neelie Kroes. I liked how the article was concise and set the foundation for future reading.
The Bloomberg article was a more colloquial piece with more information. It was more enjoyable to read due to the statements from the Treasury and the CEO of Northern Rock. It also made greater reference to the governments’ involvement in the bail-out and sale of Northern Rock.
The Times Online and Mail Online used the same figures found in other press and focused on statements from Gary Hoffman in regards to the ‘decade’ to repay the state-support. £27bn was a number that was more prevalent in the articles.
The Times reported the story with a sense of victory, “People close to the company said that Northern Rock had achieved a victory”. It is interesting choice of words since the CEO of Northern Rock did not reveal a ‘victory’ in his statements and CEO is also very close to the company I think?
The Mail Online decided to present the article in a more politically motivated way. They interviewed Treasury officials and the opposition. As a reader I felt that the article was written with political point-scoring in mind. The reporter was also very critical of the cost of the restructuring plans and was more sympathetic to Northern Rock customers.
Overall the press this week seemed to expect the approval of the break-up. However throughout the media this week journalists seem to be waiting with anticipation the outcome of the Lloyds Banking Group and RBS decisions from the EU Competition Commission. This will be a greater shakeup of the banking sector and the consequences for the taxpayer may also be as huge. It seems the taxpayer will be pulling out their wallets again very soon.
Sources
Financial Times
http://www.ft.com/cms/s/0/7a16e9d2-bf4f-11de-a696-00144feab49a.html
Bloomberg
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aihLIBx29J7w
Business Week
http://www.businessweek.com/ap/financialnews/D9BK32680.htm
Guardian
http://www.guardian.co.uk/business/blog/2009/oct/28/northern-rock-uk-banks-live-blog
Times Online
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6894551.ece
Mail Online
http://www.dailymail.co.uk/news/article-1223400/Northern-Rock-Brussels-approves-plan-split-Northern-Rock-good-bank-bad-bank-ahead-RBS-Lloyds-carve-up.html
Bailing-out Northern Rock in 2007 was a good decision from the UK government as its failure would have caused greater instability in the UK mortgage market and the economy. However, splitting the bank in 2009 still has its consequences. These questions need to be answered: Will the split create more competition? Will the customers in the ‘bad’ bank be disadvantaged? How much more will the UK taxpayer need to pay?
The split allows for the ‘good’ bank to be bought by new entrants into the banking sector such as the Virgin Money, Tesco or private equity groups. The new bank will hold all of Northern Rock’s retail deposits and a portion of its low-risk mortgages and is subject to several EU constraints. According to the Times “The bank will have to limit new lending to £4bn this year…it will also have to ensure its retail deposit balance does not exceed £20bn”. The constraints will be a deterrent to any new buyer. It will increase the number of banks in the industry but I think the new bank will still need to be very competitive to break the market dominance of established banks like Lloyds TSB and Barclays. Limits are not a good way to increase competition.
The ‘bad’ bank will then hold the remaining mortgage assets and remain under government control. The issue, according to the Mail is that four in five Northern Rock borrowers will be consigned to the ‘bad’ bank which will eventually be privatised. Are they going to face higher interest rates and uncertainty with their mortgages? The future for those customers is uncertain but I fear the worse. It is highly likely that any new owners will adjust the price of their products to maintain the viability of their business and ignore public demands.
What is certain is that the UK taxpayer is likely to make a loss from the restructuring and will be left with a bank with toxic assets in the long-term. The sale of the ‘good’ bank is also a highly politically sensitive topic as the Brown Government is likely to sell in a fire-sale that would not likely maximise value to the shareholder or taxpayer. The UK government is also injecting another £8bn into Northern Rock to fund the break-up making a total debt of £27bn to the state. The bail-out has cost the government and the taxpayer billions of pounds but it is necessary to allow the banking sector be rid of government control.
But I feel the involvement of the EU Competition Commission has created more problems for the UK banking sector. In the short-term it forces governments to sell valuable assets to new entrants at a cheap price, leaving toxic assets for the taxpayer in the long-term. The taxpayer has got the raw bargain.
In the Press this week:
The Financial Times reported the story with objectivity and with sourced information from the EU Competition Commissioner Neelie Kroes. I liked how the article was concise and set the foundation for future reading.
The Bloomberg article was a more colloquial piece with more information. It was more enjoyable to read due to the statements from the Treasury and the CEO of Northern Rock. It also made greater reference to the governments’ involvement in the bail-out and sale of Northern Rock.
The Times Online and Mail Online used the same figures found in other press and focused on statements from Gary Hoffman in regards to the ‘decade’ to repay the state-support. £27bn was a number that was more prevalent in the articles.
The Times reported the story with a sense of victory, “People close to the company said that Northern Rock had achieved a victory”. It is interesting choice of words since the CEO of Northern Rock did not reveal a ‘victory’ in his statements and CEO is also very close to the company I think?
The Mail Online decided to present the article in a more politically motivated way. They interviewed Treasury officials and the opposition. As a reader I felt that the article was written with political point-scoring in mind. The reporter was also very critical of the cost of the restructuring plans and was more sympathetic to Northern Rock customers.
Overall the press this week seemed to expect the approval of the break-up. However throughout the media this week journalists seem to be waiting with anticipation the outcome of the Lloyds Banking Group and RBS decisions from the EU Competition Commission. This will be a greater shakeup of the banking sector and the consequences for the taxpayer may also be as huge. It seems the taxpayer will be pulling out their wallets again very soon.
Sources
Financial Times
http://www.ft.com/cms/s/0/7a16e9d2-bf4f-11de-a696-00144feab49a.html
Bloomberg
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aihLIBx29J7w
Business Week
http://www.businessweek.com/ap/financialnews/D9BK32680.htm
Guardian
http://www.guardian.co.uk/business/blog/2009/oct/28/northern-rock-uk-banks-live-blog
Times Online
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6894551.ece
Mail Online
http://www.dailymail.co.uk/news/article-1223400/Northern-Rock-Brussels-approves-plan-split-Northern-Rock-good-bank-bad-bank-ahead-RBS-Lloyds-carve-up.html
Excellent 8/10
ReplyDelete