Page last updated at 12:22 GMT, Tuesday, 3 November 2009

Lloyds and RBS cut down to size

RBS and Lloyds logos
Both banks will sell off hundreds of branches

Royal Bank of Scotland (RBS) and Lloyds Banking Group are to sell off hundreds of branches in another major shake-up of the UK banking industry.

The sales have been demanded by the European Commission to safeguard competition concerns after the two were bailed out by the UK government.

RBS will sell 318 branches, while Lloyds will dispose of more than 600 branches over the next four years.

The Conservatives said another £40bn was being added to the bail-out.

Lloyds, which is 43.5% owned by the government, also confirmed it would stay out of a government-run insurance scheme and would instead raise £21bn, including a £13.5bn rights issue.

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But it will have to pay the UK government £2.5bn to avoid joining the Government Asset Protection Scheme (Gaps), which provides state insurance for past toxic loans.

The payment is to cover the "implicit protection" provided by the government since it first offered to insure Lloyds' book in February.

RBS, meanwhile, has confirmed it will join the scheme on revised - and more expensive - terms, the Treasury said.

Bonus deferrals

Both banks have also agreed not to pay any cash bonuses to staff earning more than £39,000, for their performance in 2009, while board members will defer all their bonus payments for this year until 2012.

But compensation could come in the form of shares in subsequent years.

"I believe what we have here is a better deal for the taxpayer," Chancellor Alistair Darling told the BBC.

"It is better in the long run to get private money because at the end of the day, the government does not want to be in the business of running banks," he added.

The BBC's business editor Robert Peston suggested the Treasury had now become, in effect, the biggest hedge fund in the UK.

George Osborne, the shadow chancellor, responded to the announcement by saying: "Let's not miss the elephant in the room."

"The government is having to put another £39.2bn of taxpayer's money into the banks - a bigger bail-out than the original bail-out last autumn. Yet still there is no guarantee that it will get credit flowing in the economy."

'New entrants'

In addition to the sales of RBS branches in England and Wales - originally Williams & Glyn's - RBS will sell its NatWest brand in Scotland, RBS Insurance and Global Merchant Services, its card payment business.

The total disposal will be 318 branches in the UK, or 14% of the RBS retail network.

Brown welcomes banks plan

"I believe today marks a key milestone in the radical restructuring we are undertaking to bring RBS back to stand-alone strength," RBS chief executive Stephen Hester said.

RBS said the moves would cut its UK market share by two percentage points in retail banking.

It will also sell its stake in commodities trader RBS Sempra Commodities.

Lloyds will sell at least 600 branches, or about 4.6% of the total market of UK current accounts.

That includes Lloyds TSB in Scotland along with some branches in England and Wales and mortgage broker Cheltenham & Gloucester, as well as the Intelligent Finance online business.

Lloyds says the businesses that it will have to sell off account for about £30bn of customer deposits and £70bn of lending, generating income of £1.4bn in the year to December 2008.

Mr Peston said the "forced fragmentation" of UK banks was a priority of outgoing European Competition Commissioner Neelie Kroes.

But Mr Darling insisted the government wanted the break-up to happen.

"We were very clear with the Commission that we didn't want to see the banks move pieces around a board," he said.

"I would like to see, perhaps three new entrants to the High Street."

Names like German insurance giant Allianz, Generali and Zurich are being mentioned as potential acquirers for the branches sold by RBS and Lloyds, said Douglas Fraser, BBC Scotland's business editor.

Asset insurance

Unlike Lloyds, RBS will join Gaps and have £282bn of its assets insured by the taxpayer.

That is less than £325bn of toxic assets first proposed in February, according to the Treasury.

HAVE YOUR SAY
All this taxpayer value for money and better competition talk is just spin and propaganda to hide the fact banks will be continuing under very little regulation
John Conroy, Omagh

As a result, the UK government's stake in the troubled banking giant will rise to 84%, though the Treasury said its ordinary shareholding will not exceed 75%.

RBS, which will be the only bank in the scheme, will also get a further capital injection of £25.5bn from the government agreed in February.

Under Gaps, the government insures - for a price - some of the expected future losses on past investments made by our banks.

If those losses crystallised, some of them would in effect be transferred to the taxpayer.

However, if they did not, the taxpayer might make a profit on the premiums that the government would have charged.

RBS will pay the UK government £700m a year to be in the scheme and £2.5bn to exit the scheme, if and when that happens.

'Worst managed'

City Minister Lord Myners told reporters that RBS was "the worst managed major bank this country has ever seen".

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"RBS was not brought to its knees by bad regulation, but by bad management and bad governance," he said.

As part of the latest agreement with the UK government, both RBS and Lloyds have agreed to increase lending to businesses and property owners by a total of £39bn.

Shares in RBS fell 1.4% to 38 pence, well below the average price of 50.5p paid by the government for its stake in the bank.

Lloyds was up 5.9% at 90p, also below the 122.6p price the government took to bail out the bank.



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