European Governments to Break up Big Banks

Published on
by
The Independent/UK

European Governments to Break up Big Banks

by
James Moore

Europe has given its approval to the break-up of Northern Rock into a Good Bank and a Bad Bank. (Photograph: Press Association)

Lloyds, Royal Bank of Scotland and Northern Rock
will be broken up and parts of their businesses sold off to create
three new banks, it emerged last night.

Government
sources said ministers were "determined" to see more competition in the
market, following the £1.2 trillion bailout of the sector which
resulted in the loss of three independent banks and several building societies,

The European Union will today approve the split of Northern Rock into two sections, a "good", profitable, bank with no bad debt,
and a "bad" bank. Ministers will begin exploring sale options at the
start of next year when the split happens and a deal could be finalised
before the general election. The remaining "bad" bank will remain in
state hands for the time being although sales of "tranches" of the more
risky mortgages it holds will be explored in the longer term.

The Lloyds and RBS sell-offs will follow over the next three to five years and will be supervised by UK Financial Investments, the government body set up to oversee taxpayers' investment in the banks.

The Government is understood to have made clear that existing larger operators will be banned from participating in the sales.

Ministers
want to drive competition in a sector they believe is too concentrated
in the hands of the "Big Four" of Barclays, HSBC, Lloyds and RBS.
Virgin Money is known to be watching the situation closely and is in
talks to add former Northern Rock chairman Bryan Sanderson to its board
ahead of a possible bid for Northern Rock.

Tesco is another company that could be enticed into an auction as it seeks to grow its financial services business.

Spain's
Banco Santander, which owns Abbey, Alliance & Leicester and part of
Bradford & Bingley, may be allowed to get involved because it is
significantly smaller than the big banking groups in Britain. But it
could still be frustrated by the Government's determination to attract
new entrants.

"We are keen to see greater competition in the banking sector as soon as possible," said a government source.

A
deal to buy "good" Northern Rock would bring a new entrant around £20bn
of deposits together with a portfolio of low-risk mortgages and a
platform to expand operations that remain concentrated in the
North-east nationwide.

Lloyds is expected to
face a forced reduction in its share of the retail banking market from
30 per cent to 25 per cent, with the disposal of more than a seventh of
its 3,000 branches expected.

It has been
desperately seeking support in the City for a share issue of up to
£15bn to keep it out of the Government's asset protection scheme that
will cover it against losses from up to £260bn of risky loans.

But
even if Lloyds can achieve this, it will be forced to sell parts of
itself as a consequence of the Government's injection of nearly £15bn
to recapitalise the bank at the height of the financial crisis. That
will be seen as a blow to Eric Daniels, chief executive, who indicated
at the bank's recent results that he did not expect to make significant
disposals. A spokesman said: "We continue to work with European
regulators."

Royal Bank of Scotland, meanwhile,
is working on plans to sell off a "couple of hundred" branches,
including RBS branded outlets in the UK and NatWest's Scottish
branches. It is certain to join the government scheme although how much
will be protected is not yet certain.

Final details on the Lloyds and RBS disposals are set to be announced alongside details of the asset protection scheme.

But an indication of the EU's "get tough" approach came on Monday when ING, which owns the ING Direct savings bank in Britain, said it would split itself in two to satisfy watchdogs unhappy at its bailout by the Dutch government.

Britain's banking sector was further consolidated on Monday with the announcement by Barclays of a deal to buy Standard Life Bank.

Government
sources said that while the new banks would be relatively small
compared with the big four, they hoped they would prove fast moving and
innovative.

The effect Standard Life Bank had
on the market when it was launched has been noted, although its
activities were constrained by the credit crunch.

The
Government currently has a stake of 70.34 per cent in Royal Bank of
Scotland and 43.44 per cent in Lloyds. That gives ministers the whip
hand over both banks. They are expected to take up the taxpayers'
"rights" when Lloyds launches its share issue to maintain the size of
its investment.

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