Treasury financial secretary Mark Hoban has rejected criticism over £250m of Northern Rock’s capital base being put towards the purchase of the bank by Virgin Money.
During a statement on the sale in Parliament yesterday, Shadow Treasury minister Chris Leslie asked the minister if he was not concerned that the use of the capital in the £747m deal amounted to “asset stripping”.
In September there were reports that the Treasury and the FSA were at odds over a plan to allow £500m of Northern Rock’s capital base to be used to help nudge bids for the bank over the £1bn mark. Leslie asked what safeguards were being put to in place to make sure the removal of capital does not undermine the safety of the bank.
Hoban said Northern Rock has a strong capital base and that the FSA would have to sign off on the deal.
He said: “Virgin Money has clearly set out to be a strong and dependable partner. Its core tier 1 capital ratio is 15 per cent, which is much higher than that of many existing high street banks, which averages about 10 per cent. Of course the FSA will approve the capital structure and will have to give its approval of the transfer of ownership.”
The £250m of Northern Rock capital makes up about one third of the sale price. A further £150m was taken from the capital base of Virgin Money, £250m came from US financier Wilbur Ross with Richard Branson’s Virgin Group and an Abu Dhabi fund contributing around £50m each.
In addition to this cash payment, the Government will hold a £150m capital instrument in Virgin Money which will pay interest of 10.5 per cent. In the event of a profitable sale or floating on the stock exchange within the next five years there will be a further payment to Government of between £50m and £80m.
The Previous Labour Government injected £1.4bn into Northern Rock at the height of the financial crisis after the first run on a British bank in a century. Yesterday, Labour criticised the deal as a “giveaway”. But Hoban said the sale was a good deal for taxpayers, customers and the Northeast where the bank will continue to be based.