Events | 2009.10.27
No 10 officials want to stop Northern Rock sell-off
A tug of war has begun at the top of the government over the future of Northern Rock as senior figures argue that the Treasury\'s planned sell-off should be stopped so that the ailing bank can instead be turned into a building society owned by its customers.
The move would mean forgoing a potential £11bn windfall for taxpayers but some cabinet ministers and No 10 officials believe this option is preferable to selling the bank to a rival or refloating on the stock market since it would leave the bank less prone to instability and financial risk.
However, there are concerns within the Treasury, which needs to reduce public debt and claw back some of the £25bn of taxpayer money which was used to bail out the bank in 2008.
The final decision will be taken by ministers but they want to win the support of UKFI, the company set up to run the nationalised banks after last year\'s crash. Senior government sources believe there is a convincing case that taxpayers would benefit in the long term if a remutualised Northern Rock were able to help less well-off customers get low-interest loans.
The plans are meeting resistance from those who want the bank sold off by a Labour government to prove the rescue of Northern Rock was the right thing to do.
However the policy is appealing to Labour strategists beginning to coalesce around the rolling out of mutuals, and cooperatives across other areas of the public services as a policy platform for Labour\'s future; and politically appealing, as they think it will test David Cameron\'s reforming credentials for banking .
The lobbying comes as the European commission is expected to rule on whether EU rules allow the government to break the bank\'s assets down, ringfencing its toxic debt within a bad bank and creating a good bank out of the existing savings and high-quality mortgages.
It has been thought the government would time the sale of the good bank to a newcomer to the industry, such as Richard Branson\'s Virgin Money, ahead of the general election so as to raise funds and gain a political bounce. But yesterday a senior government source said that, should the EU allow the break up, it was still possible the good part of the bank would never reach the market. Though UKFI\'s remit is to sell the bank on at value to the taxpayer, those seeking remutualisation think they can make "the case for a different long-term approach to consumer finance".
A number of senior ministers and party figures are lobbying for the bank to be kept public and made a mutual organisation.
A source said: "The issue here is whether we want some short-term financial gain to the taxpayer or [we] restructure the banking system over the long term for the better. We think we want to do the latter. The key point is … for the bank to be owned by account holders not shareholders. This kind of bank would be less prone to instability and financial risk. It would reflect the ethos of traditional building societies."
Brussels\' sanction for the break-up of Northern Rock into a "good" and "bad" bank is likely to herald a transformation of high-street banking that could lead to three new players emerging in the UK. Royal Bank of Scotland and Lloyds Banking Group are expected to be told in the coming weeks to sell off hundreds of bank branches to new players in the market.
Should Northern Rock become a mutual, ministers would want one of the building society\'s founding principles to involve delivering services across the community with direction towards the least well-off. This might include the bank being encouraged to offer high-quality low-interest loans to low earners who find it difficult to secure capital.
A government source said: "We would want to see how a remutualised Northern Rock could be used to boost savings."
The move would be welcomed by a broad coalition of senior MPs, academics and thinktanks.
Over the summer the respected Treasury select committee chairman, John McFall, backed a report written by the Oxford professor Jonathan Michie and commissioned by the Building Societies Association, which urged the government to shelve plans to sell Northern Rock and instead become a mutual again.
Treasury ministers not only want the return of the money currently loaned to Northern Rock, but are anxious to secure a fresh injection of funds into a market which still has very little lending.
Richard Branson\'s finance arm, Virgin Money, applied two weeks ago to the City regulator for a banking licence to sell current accounts and mortgages on the high street, a move interpreted as a takeover bid on Northern Rock.
However though the Treasury is expected to rule the mutualisation of Northern Rock unaffordable, the Treasury minister Sarah McCarthy-Fry told a Labour party conference event that nobody had "ruled out the remutualisation of Northern Rock".
For more information, please visit
http://www.guardian.co.uk/business/2009/oct/27/northern-rock-no-10-officials
