Britain is to force state-rescued banks RBS and Lloyds Banking Group to sell assets in a massive shake-up of the banking sector but will support them with 30 billion pounds, the government said on Tuesday.
The government expects new banks to be born as a result of the break-ups which are the result of pressure from EU competition authorities.
The parts being separated from the parent groups add up to about 10 percent of Britain’s troubled retail banking market.
In return for more state aid, Lloyds and Royal Bank of Scotland (RBS) will have to cut bonuses paid to top staff and increase lending to recession-struck businesses and individuals.
Lloyds announced that it would launch a record 13.5-billion-pound rights issue. This represents the biggest-ever sale in Britain of new shares to existing shareholders.
Tuesday’s announcement meanwhile comes one week after the European Commission approved the state aid in plans to break up and sell Britain’s nationalised bank Northern Rock.
“Today will be the day that we see the beginning of the greatest changes in UK high street banking ever,” said senior trader Manoj Ladwa at ETX Capital.
“The creation of three new banks, dramatic divestments from both Lloyds and in particularly RBS, mammoth fund raising for both banks including the British taxpayer dipping into their pocket.”
British Prime Minister Gordon Brown said the shake-up would create competition and place the two banks on a more solid footing. “I believe at the end of the day the banks will be paying money to the British public and not the other way round,” Brown said.
Despite pumping 30 billion pounds (33 billion euros, 49 billion dollars) into the two banks, Tuesday’s move means that the taxpayer’s exposure has been cut by more than 300 billion pounds, finance minister Alistair Darling added.
This is largely because of Lloyds’ decision not to participate in the toxic asset protection scheme.
“To promote greater competition in UK banking, and meet EU state aid rules, the banks will… be required to make divestments of significant parts of their businesses over the next four years,” the Treasury said in a statement.
Britain’s biggest retailer, supermarket giant Tesco and Richard Branson’s Virgin Group are rumoured to be interested in expanding their own banking services. “We are going to see at least three new banks operating on the British high street in the next four years and that is very good news for the British taxpayer, the British consumer,” Treasury Minister Paul Myners told the BBC.
Under the plans, the state will pump 25.5 billion pounds into Royal Bank of Scotland, which in turn will place 282 billion pounds of high-risk debts into the government’s toxic asset insurance scheme — lower than originally planned.
As a result of the move, the state’s economic interest in RBS will climb to 84 percent. In addition, RBS will have access to a contingency fund of eight billion pounds.
In trading here, RBS shares plunged 8.52 percent to 35.36 pence on the FTSE 100 index of leading companies, which was down 2.20 percent. Lloyds stock rose briefly as the group also said that a record rights issue would allow it to avoid the state’s toxic asset insurance plan — but it will pay a 2.5-billion-pound break fee.
The government said it would take part and maintain its 43-percent stake in Lloyds.
Royal Bank of Scotland will sell its RBS-branded branches in England and Wales, and NatWest branches in Scotland, as well as its Churchill and Direct Line insurance division and parts of its investment banking arm.
Ahead of Tuesday’s announcement, RBS had revealed on Monday that it would axe about 3,700 jobs across its British retail operations.
Lloyds Banking Group added on Tuesday that it would offload Lloyds branches in Scotland, its Cheltenham & Gloucester branches, and the Intelligent Finance online unit.
“UK consumers will in theory enjoy increased choice and lower pricing, while rivals such as HSBC will be glad to see their rivals paying for their mistakes,” said analyst Keith Bowman at Hargreaves Lansdown stockbrokers.
The Treasury has reached agreement “in principle” with EU Competition Commissioner Neelie Kroes over the restructuring.
Regulatory authorities are concerned that such state-backed banks have an unfair advantage over other institutions which weathered the global financial storm without government aid, such as Barclays and HSBC.
