Page last updated at 15:49 GMT, Sunday, 1 November 2009

High Street banks to be broken up

Chancellor Alistair Darling says bank sales will only happen "when the time is right"

Chancellor Alistair Darling has confirmed that Lloyds, RBS and Northern Rock will be broken up and parts sold to new entrants to the banking sector.

He said there could be three new High Street banks in the UK over the next three to four years as a result.

But the chancellor said he would only sell parts of the banks when "the time is right", to ensure taxpayers get their money back.

There is speculation that buyers might include Tesco and Virgin.

'Clean sheet'

In order to boost competition, the banks' assets will only be sold to new entrants to the UK banking market and not to existing financial institutions.

Joe Lynam, business correspondent
Joe Lynam, BBC business correspondent

As part of the stipulations of EU state aid rules, the UK was always facing the prospect of having to sell off at least parts of those banks which it bailed out last year.

Now it looks as if that sell off process is to begin in earnest.

Though the Chancellor says he has not yet decided which brands are to be hived off, RBS, Northern Rock and Lloyds Banking Group (LBG) will now be broken up in some form.

This means that individual brands within those banks, such as Cheltenham & Gloucester and the TSB (LBG), as well as Williams and Glyn (RBS), could be sold off.

The unanswered question now is whether the Treasury jumped or was about to be pushed by Brussels.

The new banks will be standard retail operations concentrating on deposits and mortgages.

Mr Darling said this was the best way to ensure "proper competition and choice". He said having just "half a dozen big providers was not acceptable".

The new entrants would "have a clean sheet to come in and do things differently", he added.

The chancellor also said the government would be splitting up Northern Rock into two parts by the end of the year, with a view to selling off one part within the next three to four years.

The government had already said it wants to sell off the part of Northern Rock that holds savers' money, carries out new lending and holds some existing mortgages.

He also said the government was keen to divest some of its holdings in RBS and Lloyds.

The government currently holds a 70% stake in RBS and a 43% stake in Lloyds after last October's bail-outs.

'Unnecessary distraction'

BBC business correspondent Joe Lynam says the latest move represents "a gilt-edged opportunity for non-UK retail banks, especially from the US, to get a firm foothold in the highly profitable British banking market for as low a price as could be imagined a few years ago".

The Conservatives said the break up of the state-owned banks had already been "well trailed".

A spokesman added: "We have called for more competition in banking, and for government stakes to be used to strategic effect to that end."

The Lib Dems Treasury spokesman Vince Cable welcomed more competition in the banking sector but said there should be no urgency to the sales.

"We need to be careful that when these split-ups occur, the prime cuts are not offered to private investors and the scraps left to taxpayers," he said.

There were also concerns expressed about the timing of the sell-off.

Treasury select committee chairman John McFall MP said the assets should not be sold off for less than their market value.

"It is important to ensure that we get taxpayer return for this bail-out. I'm relaxed about the timescale. I do not want to sell off [bank assets] at a cheap price, I don't want a fire sale," he told the BBC.

Peter McNamara, former head of personal banking at Lloyds TSB and managing director of the Alliance and Leicester, said that restructuring the banks in the current climate could in fact prove counter productive.

"Half the banks in the UK are suddenly going to be reorganised when you could argue their day job is to support industry and consumers during the recession. Without that support, we are more likely to have a steeper rise in unemployment," he said.

The government needs permission to break-up the banks from European competition commissioner Neelie Kroes.

Last week, the EU approved the plans for Northern Rock to be split in two.

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