Northern Rock to shed staff and mortgages to meet EU aid rules

Northern Rock's mortgage book and workforce will shrink dramatically under a restructuring plan designed to ensure it satisfies tough European Union rules on state aid.

Alistair Darling, the chancellor, is due to submit to Brussels on Monday formal notification that he wants to continue giving state aid to Northern Rock as part of proposals expected to include a drastic reduction in the size of the bank's mortgage book and heavy job losses.

The full proposal may not be presented by Ron Sandler, the bank's chairman, until early April, at which point Mr Darling is also expected to make a Commons statement. The plan is likely to see the Rock, which wrote one in five new mortgages in the first half of 2007, radically shrink its £113bn balance sheet to up to half of its current size.

Northern Rock is now forecast to repay about £10bn of its £24bn Bank of England loan in one year, suggesting its balance sheet is likely to be shrunk aggressively.

The bank is also looking at using its strong links with mortgage brokers to encourage existing customers coming to the end of their fixed-rate mortgage deals to refinance with other banks.

Northern Rock has been doing very little new mortgage business since September and its mortgage lending so far in the first two months of 2008 has been an estimated 10 per cent of the volumes it lent 12 months ago.

However, Northern Rock will need to write a certain level of mortgages because of its obligations to place new mortgages into Granite, its mortgage securitisation vehicle.

Heavy job losses are also expected as the bank, which employs 6,500 staff, reduces new mortgage business. It has expanded aggressively in line with mortgage volumes. In 2002, for example, it employed 3,800.

One possibility being looked at to preserve jobs in Newcastle is that Northern Rock could offer administrative services to other lenders in return for a fee.

Meanwhile Virgin, which led a consortium bidding for the Rock, still wants to expand into UK banking. The group, which owns consumer finance operation Virgin Money, is looking at various possibilities - including launching its own standalone bank.

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