Page last updated at 13:38 GMT, Tuesday, 3 November 2009

Sell-off move leaves banks in flux

By Hugh Pym
Chief economics correspondent, BBC News

Heavily trailed these banking announcements may have been, but even so, they have proved to be more dramatic than expected.

RBS headquarters in London
RBS is expected to sell off branches in England and Wales

A bigger injection of taxpayers' cash will be made and the disposal of branches demanded by the European Commission will be more wide-ranging than anticipated.

First, the government investments in Lloyds and RBS. For the former, the deal is more or less as expected.

Lloyds will stay out of the government scheme to insure toxic loans (known as APS) and raise £21bn from investors.

Of that figure, £5.7bn will come from the Treasury exercising its rights to buy shares to keep its overall stake in Lloyds at about 43%. Set against that is a fee of £2.5bn which Lloyds will pay the government.

With RBS, the taxpayer investment is even higher than anticipated: £25.5bn will be injected into the bank.

This sum is broadly in line with what was set out in February when the scheme to insure bad loans was unveiled.

Price to pay

But a further £8bn will be available to RBS, should it be needed if things get worse for the bank. This "rainy day" money will be an extra potential future burden on the taxpayer.

Government sources point out, though, that the amount of toxic debt being insured under APS is smaller than first estimated and RBS will take on a bigger share of potential losses. It will also pay fees of at least £2.5bn.

As regards the branch disposals, Lloyds is having to shed even more than expected by the markets. The European Commission has demanded a heavy price for the bank trading on under the wing of the government.

Lloyds must sell 600 branches, covering 4.6% of the entire UK current account market. Under the hammer will come Cheltenham & Gloucester, Lloyds TSB in Scotland and a chunk of the bank's branches in England and Wales.

The TSB brand itself will be sold off. This is an enticing proposition for any new banking player keen to enter the market.

RBS, as expected, will have to sell more than 300 branches in England and Wales and a few more NatWest branded branches in Scotland. Insurance businesses like Direct Line and Churchill must also go.

These sales will take place over the next couple of years. Until they are completed, the banking market will be in flux.

A big shake-up has been set in train. The government hopes it will generate increased competition, with new banks being created.

It may prove beneficial for the consumer in the longer term. For a while though, it will seem confusing for thousands of customers at Lloyds and RBS, as they wonder who will take over their banking business.

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