British government announces major bank restructuring (Roundup)

Nov 3, 2009, 14:26 GMT

London - The British government Tuesday announced a major shake-up of the banking industry aimed at increasing competition and regulation in the sector, a year after it was rescued from collapse in a massive government bail-out.

Under the scheme, the Royal Bank of Scotland (RBS) and Lloyds Banking Group - which were both partially nationalized last year - will have to sell off major assets to private buyers who would set up three new banking chains by 2015.

The proposed sale of a total of more than 900 branches nationwide follows a ruling by European Union (EU) regulators demanding that banks which received state aid should not have an unfair advantage.

The government has already announced plans to return mortgage lender Northern Rock to the private sector.

Prime Minister Gordon Brown said the steps taken would ensure that 'it's not the British public financing the banks, but the banks paying back the British public.'

Alistair Darling, the chancellor of the exchequer, said it was '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.'

RBS is selling RBS-branded branches in England and Wales, its NatWest branches in Scotland, the Churchill and Direct Line insurance arm and parts of its investment banking business as the price of state support.

Lloyds Banking Group will divest its Lloyds branches in Scotland, its Cheltenham & Gloucester branches, and the Intelligent Finance online business.

The plans mean that 10 per cent of all of Britain's banking capacity will be freed up for sale by new buyers, which could include major high-street brands such as the Tesco supermarket chain or Richard Branson's Virgin Group.

German insurance giant Allianz, Generali and Zurich have also been mentioned as potential buyers.

Trade unions said they feared that up to 25,000 jobs could be lost as a result of the government's restructuring plan.

RBS said a further 3,700 jobs would be cut at branches nationwide, in addition to the loss of 16,000 jobs in the bank's investment arm announced earlier this year.

The government will pump around 30 billion pounds (49 billion dollars) more into the two banks under the proposals.

Edinburgh-based RBS will receive 25.5 billion pounds in cash upfront from the Treasury as part of the plans for the asset protection scheme (APS).

RBS chief executive Stephen Hester said the announcement marked a 'significant step forward' for the bank, which lost a record 24.1 billion pounds in 2008.

With the new cash injection, the government's stake in RBS has risen from 70 per cent to 84 per cent.

Lloyds Banking Group said it would avoid the government's asset protection scheme by raising 21 billion pounds, including a rights issue of 13.5 billion pounds, which is backed by the government to the tune of 5.7 billion pounds.

The Treasury said both banks would be required to meet 'tough conditions' on pay and lending. Bonuses for executive directors due this year will be deferred until 2012, while no discretionary cash bonuses for staff earning more than 39,000 pounds will be paid this year.

However, the opposition Conservatives criticized the scheme, saying the government had put billions more of taxpayers' money into the banks without obtaining a guarantee that credit would start flowing again.

Analysts said the proposals are half-hearted, as the government had shied away from taking radical measures, such as a complete split between retail and investment banking.

The creation of a few 'Mickey Mouse banks' would do nothing to stabilize Britain's banking sector, which had been hard-hit by the loss of confidence as a result of the mortgage-lending crisis, said David Buik, analyst at stockbrokers firm BGC Partners.