It’s been a bit of a manic day today as we've spent most of the day talking about the news that the European Commission, after an eighteen month investigation, have given the all clear for Northern Rock to be split up into a ‘good bank’ and a ‘not-so-good bank’. Not just this news, but also the news last week that they would shrink ING by half and the implications for other banks, such as Lloyds.
The Northern Rock news will call the 'good bank' Northern Rock plc, and will have all the branches, customer deposits, savings and low-risk mortgage book. The other half will be the Northern Rock Asset Management firm, and will keep the more risky mortgages worth about £40 billion.
The intention is to sell the good bank and for the government to keep the not so good bank until it can be made good, or the losses written off.
This gets interesting as it means that Britain’s first sign of big trouble – the Northern Rock –which went into terminal decline after a bank run back in late summer 2007 can finally pay back the £28 billion invested and give a return to the taxpayer.
The fact the European Commission saw no competitive issues is also interesting, as the government pledged £9 billion to help get Northern Rock lending this year – in fact, they told the management to stop repaying the £28 billion loan so fast – and this resulted in very attractive rates for new mortgages that, in the case of three of their products, are far better than anyone else’s. Is that competitive?
There’s also the question of who will buy them, and all money is on Virgin Money.
Virgin applied for a banking licence last week, and is clearly positioning to get more business. But without branches they may feel confined to just being a telephone bank.
They expressed interest in buying Northern Rock back when these troubles started, and still want a slice of an existing bank operation.
The real interest must be however in how much more of the UK High Street Virgin could get.
For example, the European Commission came out against ING last week and told them to split into two firms – a bank and an insurance group – and to get rid of ING Direct in America.
In other words, shrink the bank to about half its current size.
Similarly, back in May, they did the same with Commerzbank.
It would be unthinkable to imagine that when they look at the Lloyds TSB and HBOS merger that they wouldn’t do the same – in other words, shrink the bank – but the question is by how much.
Forty percent plus may seem harsh, but as the new Lloyds Banking Group has a third of all UK customer mortgages and deposit accounts, it must be major cutbacks.
Rumours are, for example, that Lloyds will need to sell off about 500 of their 3,000 branches.
Meanwhile, Santander has a lot of overlap on some high streets, thanks to having Alliance & Leicester, Bradford & Bingley and Abbey in their group. So they will probably want to sell some branches too.
As will Royal Bank of Scotland.
This means that Virgin could rapidly become a 1,000 plus branch-based bank in Britain by the end of the next couple of years, if they want to be.
So this is good for competition?
Or is it just creating a new bank brand for Virgin at low cost based upon easy pickings.
We shall see, but either way having a few new banks like Virgin, Tesco and Metro in the UK must be good for the consumer as we do need a bit more competition that the cartel that has been there historically.
So thank you Nellie Kroes and the European Commission.