The criticisms were outlined in the BSA’s submission to the European Commission which is investigating the Government’s plans for Northern Rock.
The BSA says the proposed amendments to the state aid for Northern Rock to split the bank into a good bank, BankCo, and a bad bank, AssetCo, will give it an unfair advantage over other building societies.
The BSA says: “The proposed BankCo firm will have a very strong position in the mortgage market, as its initial balance sheet has no or few non-performing loans. BankCo is likely to be able to lend freely, without having to absorb losses from any non-performing loans, unlike all of its competitors in the UK mortgage market, to varying degrees.”
The BSA is asking the EC to impose certain requirements on the restructure in order to overcome competition issues. It says BankCo should be required to pay an annual premium to the Government to cover part of the cost of the protection it has gained from the establishment of AssetCo.
The trade body also wants the Government guarantee covering retail and wholesale deposits to be removed, as this allows BankCo to obtain a lower cost of funding than its competitors.
If these measures are not effective in addressing these issues then BankCo should be required to make a substantial proportion of its new lending in segments of the mortgage market where private sector lenders are not currently lending, such as at high LTV ratios, or specifically to first-time buyers.
The BSA adds: “In areas of the mortgage market where BankCo is competing with a number of private sector lenders its price competitiveness should be limited, possibly by staying out of the Moneyfacts best buy tables for mortgage products.
“Until the explicit guarantee covering retail deposits is removed, Northern Rock should be required to stay out of the top five savings accounts in Moneyfacts best buy tables.”
In a statement this morning, Northern Rock said it would be deferring paying interest on a number of subordinated bonds until further notice. It said it is waiting for approval from the European Commission on its planned restructure and further state aid.