A statement from the Government-owned bank last week said its capital base has reduced to a level below minimum regulatory capital levels. The bank was granted a waiver in July last year by the FSA, making its capital requirements more flexible, but since the start of 2009 ratios have deteriorated further.
Northern Rock hopes to address the problem through a legal and capital restructuring of the company. The move would see Rock divided into two entities – BankCo and AssetCo. BankCo will hold deposits, branches and unencumbered mortgage assets. AssetCo will be made of the Granite master trust, all covered bonds, the Rock mortgage book and all other wholesale instruments. It will also hold the Government loan on its books.
There were also reports last week that Tesco could be a potential bidder for the bank and Virgin boss Sir Richard Branson continues to express interest in making a bid.
Brentchase Financial managing director Mike Fitzgerald says: “I know quality business is flowing into Northern Rock so this is most probably a temporary dip in capital ratios. If on the next reporting quarter they are still heading lower, it is time for serious action.”