Page last updated at 18:20 GMT, Monday, 2 November 2009

Lloyds and RBS 'to face shake-up'

RBS logo
RBS is to take part in the government scheme, but not Lloyds

A big shake-up of UK banks with taxpayer support will be unveiled on Tuesday, the BBC understands.

Announcements on the future of Lloyds and Royal Bank of Scotland (RBS) will be made by the banks and the Treasury.

Both firms will have to set up new banks from existing branch networks and sell them within four years.

In another development, RBS has said it is to cut 3,700 jobs across its UK branches, adding it hoped to achieve most through voluntary redundancy.

The jobs are to go over the next two years.

RBS said it was over-staffed compared with competitors and needed to trim costs, and that the cuts were unconnected to Tuesday's planned announcements.

The firm has already unveiled 10,000 job cuts in its investment banking and back office activities in the UK, and a further 6,000 redundancies in overseas operations.

It has a total workforce of 170,000, of which 105,000 are in the UK.

European rules

Lloyds is expected to say on Tuesday that it will raise more than £20bn from investors in return for staying out of the state-run insurance scheme to cover toxic loans.

The creation of the new banks is on the instruction of the European Competition Commissioner Neelie Kroes and is supposed to boost competition.

RBS is also expected to confirm that it will participate in the government's toxic loan scheme, but on different terms.

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The bank, which is 70% state-owned, would buy an insurance policy from the government to cover future losses from some of its more toxic investments.

Tuesday's announcements are set to include approval from the European Commission of plans to cut back the size of the banks with disposals of branches and other assets.

The Commission had demanded that banks bailed out by taxpayers should be scaled down.

It is not yet clear how the Commission will indicate its backing for the plan. However, a source close to the talks told the BBC that barring last-minute legal technicalities, a full announcement would be made on Tuesday.

'Recovery plan'

Hugh Pym
By Hugh Pym, Chief economics correspondent
This will be a big day for British banking, the latest chapter in the bailout saga.

A series of announcements anticipated at Lloyds and RBS will tie up the loose ends of the asset protection scheme announced in February. This was intended to provide a taxpayer insurance scheme for toxic loans. Lloyds has decided it can stay out and go it alone, with its own mammoth capital raising on the private markets. RBS will need to join the scheme, though on slightly different terms to those envisaged earlier this year.

Hovering in the background is the European Commission, which has demanded that banks bailed out with state aid should scale themselves down. A big asset sale will be announced. Under the hammer will be hundreds of RBS and Lloyds branches and insurance businesses such as Direct Line.

The government hopes that these asset sales will attract new players into the banking market. That remains highly uncertain, as does the reaction of the banks' shareholders.

RBS has already warned that it may have to sell more of its businesses than originally planned to gain European approval for state support it has received since coming close to collapse last year.

On Tuesday, it is set to announce the sale of its insurance businesses Direct Line, Churchill and Green Flag as well as more than 300 bank branches, according to BBC chief economics correspondent Hugh Pym.

For its part, Lloyds will announce the sale of Cheltenham & Gloucester and Intelligent Finance.

On Friday, the BBC reported that Lloyds Banking Group was set to end weeks of speculation by announcing it would not join the government's asset protection scheme.

Lloyds believes it can survive without joining the scheme and is prepared to pay a fee of close to £2.5bn to avoid it, by selling shares to the government at a reduced price.

The banking group, 43% owned by the taxpayer, is thought to want to avoid the additional government influence which comes with the scheme.

BBC business editor Robert Peston says that this represents another massive transfer of wealth from Lloyds' private-sector shareholders to the state.

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