Northern Rock's capital reserves fall below required levels

Jul 1 2009 By Andrew Mernin

THE Northern Rock has been given the go-ahead to continue without the necessary level of capital reserves until its restructuring request has been decided upon by the European Commission.
In 2008 the nationalised lender revealed it had made pre-tax losses of £1.36bn after repossessing 63% more homes than the previous year and reducing its Government loan from £26.9bn to £8.9bn.
And with the Rock expected to make a further loss in 2009 the levels of capital it should hold in reserve have now declined below the levels the regulator, the Financial Services Authority (FSA), require.
But the FSA today confirmed it will make an exception for the Northern Rock and waiver the capital reserve requirements until a decison has been made on its restructuring request by the EC.
A spokesman for the Rock said: “Northern Rock's capital base has now reduced to a level below its minimum regulatory capital requirement. 
“Northern Rock proposes to address this situation through a legal and capital restructuring of the company.
“The Government is also committed to providing a further £3bn to the company when, as is expected, the restructuring is approved by the EC.”
The Rock expects to get permission from the EC to split itself into two separate entities commonly referred to as the “good bank” and the “bad bank” prior to being sold off.
The good bank will include all of the retail deposits, the branch network and some higher quality mortgages. The bad bank will mostly include the “toxic” mortgages and include those loans it made in 2006 and 2007 which were 125% of the value of a property.
Part of the EC deal will see the Government give the Rock a further £3bn which will help improve its capital position.
The Rock today declined on speculation that Tesco has made an approach to the buy the good bank.