Britain unveils huge bank shake-up for RBS, Lloyds

Britain is to break up state-rescued lenders Royal Bank of Scotland and Lloyds in a massive shake-up that will also see an extra £30 billion injected into the two banks, the Treasury said yesterday.

Both banks, which were bailed out at the height of the global financial crisis, will be required to meet "tough" requirements on staff pay and lending in return for the funds, equivalent to €33 billion.

"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.

Under the plans, the British government will pump another £25.5 billion into Royal Bank of Scotland. RBS will also place £282 billion of high-risk debts into the government's toxic asset insurance scheme.

The developments will see the government's economic interest in RBS climb to 84 per cent and its voting rights rise to 75 per cent.

Lloyds meanwhile unveiled plans to raise at least £21 billion of new funds and pay a £2.5 billion fee for avoiding the state's asset protection scheme (APS).

The fundraising includes a record £13.5 billion rights issue - which would represent Britain's biggest-ever sale of new shares to existing shareholders.

The government said it would take part and maintain its 43 per cent stake in Lloyds.

"Lloyds will not participate in the APS and instead will raise additional private sector capital and pay a fee to the taxpayer for the implicit protection provided to date," the Treasury added. "This will reduce the risk borne by the taxpayer, improving value for money."

RBS said in a separate statement that it would sell its RBS 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.

Lloyds Banking Group added that it would offload its Lloyds branches in Scotland, its Cheltenham & Gloucester branches, and the Intelligent Finance online unit.

"The likely costs to the taxpayer and the risks on the impact on the public finances have been reduced," the Treasury added yesterday.

"Both banks will still be required to meet tough conditions on pay and lending."

The Treasury has meanwhile reached agreement "in principle" with EU Competition Commissioner Neelie Kroes over the restructuring.

"The government has reached agreement in principle with Commissioner Kroes after constructive and helpful discussions on a package of restructuring and other measures, which we are confident will address the concerns of the European Commission," it said.

The banking assets would only be sold to minor or new entrants into the British banking sector.

"To ensure these divestments increase diversity and competition in the UK banking market, the assets can only be sold to small or new players in the market," the Treasury added.

"The divestments from each bank will represent a viable stand-alone entity, together representing nearly 10 per cent of the UK retail banking market."

Ahead of yesterday's announcement, RBS revealed on Monday that it would axe about 3,700 jobs across its British retail operations.

The bank had also said it would consider selling more assets than initially planned to win EU support for the state aid received by the group.

Last weekend, British Finance Minister Alistair Darling had detailed plans to create three new high street banks from the bailed-out lenders RBS, Lloyds Banking Group and Northern Rock. The latter was nationalised outright.

Regulatory authorities are concerned that such state-backed banks have an unfair advantage over other institutions that weathered the global financial storm.