Rock cleared to write loans

NORTHERN Rock has been cleared by the Financial Services Authority (FSA) to keep lending, despite breaching its minimum capital requirements.

The FSA had already granted the nationalised mortgage lender a waiver to write new mortgages despite its low levels of capital, permitting the bank to include tier two capital – a riskier type of cash reserve – in order to meet regulatory requirements.

But the City watchdog will now give the lender what one Rock insider termed “a period of forbearance”, until the European Commission (EC) clears a £3bn state cash injection.

If the EC gives its blessing – which is unlikely to happen until the autumn – Rock will restructure itself into two units, BankCo and AssetCo, which will receive the cash boost.

Bidders are likely to focus on BankCo, which will include the bank’s highest quality assets, new loans, branches and deposits.

Tesco and Sir Richard Branson’s Virgin Money are both eyeing up the lender, with Prime Minister Gordon Brown keen to see a sale to provide a much-needed coup prior to the general election.

A spokesman for Virgin Money hinted that the outfit would look at buying part or all of Northern Rock when the opportunity arose.

“We’ve consistently said that we have the brand and management team to build a bank and that the market needs new entrants,” he said.

“We’ve never hid our intentions to be a bank but that will depend on market conditions and we’re still assessing the best time and opportunity to enter the market.”

Analysts say Northern Rock must have lost at least £1bn to have breached FSA rules.