My right honourable friend the Chancellor of the Exchequer (Alistair Darling) has made the following Written Ministerial Statement.
On 18 March I informed the House (Official Report, cols. 53-4WS) that the Government had formally notified to the European Commission proposals to continue to provide state aid to Northern Rock to support a restructuring of the company during the period of temporary public ownership. In addition, the Board of Northern Rock plc set out in general its plans for the future direction of the business during the period of temporary public ownership. The Government's objectives in relation to Northern Rock remain the protection of taxpayers and consumers, and the maintenance of financial stability.
The Board of Northern Rock plc has today published its annual report and accounts for 2007. These show that the Bank of England loan facilities to Northern Rock plc as at 31 December 2007 stood at £26.9 billion. Since then some £2.5 billion has been repaid and the gross loan stands at around £24 billion. These accounts also demonstrate that Northern Rock remains solvent and meets its regulatory requirements.
The Board of Northern Rock has also published a more detailed business plan, which I have approved, based around four objectives:
contracting to a smaller, sustainable business through a reduction of the asset base from £107 billion in 2007 to £49 billion in 2011, while maintaining on average around £5 billion a year of new mortgage origination over this period and continuing to treat customers fairly;
repaying of the Bank of England loan by the end of 2010 and enabling the Government to release its guarantee arrangements gradually by 2011, subject to the Financial Services Authority being satisfied of the capital position of Northern Rock at that time. In the mean time, the existing government guarantee arrangements remain in place. Depositors' money continues to be safe and secure. Retail deposits are projected to increase to £20 billion by 2011 providing closer to half the company's funding needs - but in total will remain below 2007 levels;
restructuring the organisation and its operations so that these are aligned to the business objectives; and
strengthening risk management in key business areas.
This business plan meets the Government's objectives. As set out in the Budget, the Government will, during 2008-09, replace the Bank of England's loan to Northern Rock with direct Treasury funding. The Bank of England and the Treasury are agreeing with Northern Rock the terms of this financing. This will include a back-up liquidity facility, to meet the Financial Services Authority's requirements, that may remain in place beyond 2010 until sufficient alternative liquidity arrangements are in place. Northern Rock will maintain, but contract over time, its Granite securitisation vehicle.
Furthermore Northern Rock has published as part of its business plan a competitive framework, which is subject to European Commission approval, setting out its commitment not to take unfair advantage of government support during the state aid period. It will commit to a series of steps, in particular Northern Rock will restrict itself from positions of market leadership on any product category for 2008.
I have also agreed with Northern Rock a shareholder agreement that sets out the framework within which HM Treasury will operate its shareholder relationship with Northern Rock. This sets out our intention to run Northern Rock on an arm’s length, commercial basis, while approving strategy and holding the board to account for performance against the business plan.
I have placed copies of the accounts, business plan and shareholder framework agreement in the Libraries of both Houses.