EU launches investigation into Northern Rock bailout

The European Commission have launched an investigation into the Government’s multi-billion pound survival plan for crisis-torn bank Northern Rock.

The investigation is expected to run for several months and will study the rescue plan proposed by chairman Ron Sandler earlier this week. It will also determine whether the special support complies with the European Union’s strict rules on state aid.

Competition commissioner Neelie Kroes said the Commission needs to open a formal investigation into UK measures to restructure Northern Rock to ensure legal certainty, notably in view of the large scale of the aid measures, the background of current conditions in financial markets and the risks of distortion of competition.

Ominously, her spokesman added that the advantage of launching this investigation would be that it ‘will give guidance to others as to how these things should be handled’. That suggests the Commission does not necessarily believe that Northern Rock will be the last major bank in Europe to need a state bailout as a result of the US sub-prime crisis and subsequent credit squeeze.

However, authorities in the EU and UK are keen to ensure the rescue plan is watertight and cannot be challenged by rival banks in the European courts.

Northern Rock hit difficulty last summer after problems in the US housing market prompted a global credit squeeze. Faced with poor market conditions, many banks stopped lending to each other and Northern Rock’s main source of financing dried up.

Consequently, the bank was forced to go to the Bank of England for emergency funding, which prompted a run on the lender.

After rejecting takeover bids from the board of Northern Rock and a consortium led by Sir Richard Branson’s Virgin Group, the Government rushed through legislation to nationalise the bank in February.

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