Britain breaks up RBS, Lloyds in big bang for banking

Britain is to force state-rescued banks RBS and Lloyds Banking Group to sell assets in a massive shake-up of the banking sector but will support them with 30 billion pounds, the goverment said on Tuesday.

The government expects new banks to be born as a result of the break-ups which are the result of pressure from EU competition authorities.

The parts being separated from the parent groups add up to about 10 percent of Britain's troubled retail banking market.

In return for more state aid, Lloyds and Royal Bank of Scotland (RBS) will have to cut bonuses paid to top staff and increase lending to recession-struck businesses and individuals.

Lloyds announced that it would launch a record 13.5-billion-pound rights issue. This represents the biggest-ever sale in Britain of new shares to existing shareholders.

"Today will be the day that we see the beginning of the greatest changes in UK high street banking ever," said senior trader Manoj Ladwa at ETX Capital.

"The creation of three new banks, dramatic divestments from both Lloyds and in particularly RBS, mammoth fund raising for both banks including the British taxpayer dipping into their pocket.

"If all goes to plan then it should restore confidence in the UK banking sector, circumnavigate competition issues and give the UK Treasury value for money.

"But what if it doesn?t go to plan? What if we have a double dip recession? These are the questions the markets will be asking and as yet it is not clear that a consensus view has been reached."

"We're creating more competition in banking, we're making sure our banks are built on a more solid basis," said British Prime Minister Gordon Brown, who expressed confidence that state funds would be repaid in the long term.

"I believe at the end of the day the banks will be paying money to the British public and not the other way round."

Britain's biggest retailer, supermarket giant Tesco and Richard Branson's Virgin Group are rumoured to be interested in expanding their own banking services.

Tuesday's announcement meanwhile comes one week after the European Commission approved the state aid in plans to break up and sell Britain's nationalised bank Northern Rock.

"To promote greater competition in UK banking, and meet EU state aid rules, the banks will... be required to make divestments of significant parts of their businesses over the next four years," the Treasury said in a statement.

Both RBS and Lloyds, which were bailed out at the height of the global financial crisis, must meet "tough" requirements on bonuses and lending in return for 30 billion pounds (33 billion euros, 49 billion dollars).

"We are going to see at least three new banks operating on the British high street in the next four years and that is very good news for the British taxpayer, the British consumer," Treasury Minister Lord Myners told the BBC.

Under the plans, the British government will pump another 25.5 billion pounds into Royal Bank of Scotland, which in turn will place 282 billion pounds of high-risk debts into the government's toxic asset insurance scheme.

As a result of the move, the state's economic interest in RBS will climb to 84 percent. In addition, RBS will have access to a contingency fund of eight billion pounds.

In trading here, RBS shares plunged 5.08 percent to 36.69 pence on the FTSE 100 index of leading companies, which was down 2.12 percent.

However, Lloyds stock rose 1.20 percent to 86.02 pence as the group also said that a record rights issue would allow it to avoid the state's toxic asset insurance plan -- which would have attracted a hefty fee.

The government said it would take part and maintain its 43-percent stake in Lloyds.

Royal Bank of Scotland will sell its RBS-branded branches in England and Wales, and NatWest branches in Scotland, as well as its Churchill and Direct Line insurance division and parts of its investment banking arm.

Ahead of Tuesday's announcement, RBS had revealed on Monday that it would axe about 3,700 jobs across its British retail operations.

Lloyds Banking Group added on Tuesday that it would offload Lloyds branches in Scotland, its Cheltenham & Gloucester branches, and the Intelligent Finance online unit.

"UK consumers will in theory enjoy increased choice and lower pricing, while rivals such as HSBC will be glad to see their rivals paying for their mistakes," said analyst Keith Bowman at Hargreaves Lansdown stockbrokers.

The Treasury has reached agreement "in principle" with EU Competition Commissioner Neelie Kroes over the restructuring.

Regulatory authorities are concerned that such state-backed banks have an unfair advantage over other institutions which weathered the global financial storm without government aid, such as Barclays and HSBC.