James Moore: Questions and answers on the bank shake-up

Q. So exactly how much more of our money are these banks taking?

In total the Government is making available £39.2bn. The lion’s share will go to Royal Bank of Scotland. Some £25.5bn of this was announced in February but the sting in the tail is that another £8bn is being made available to the bank to cover it in the even of a worst case scenario (read, financial meltdown). Lloyds is raising £21 billion. Of that, £13.5 billion will come from and the tax payer will put up £5.7 billion to buy its rights. The remainder will come from private shareholders and bondholders.

Q. Is that it?

Not quite. The Government has agreed to cover RBS against 90 per cent of the losses made on £282 billion of risky assets after the first £60 billion. RBS says it “probably won’t need the money” from this Asset Protection Scheme, but it can’t be sure. The maximum payout from the state would therefore be a further £218bn, although that assumes an absolute worst case scenario (read, global depression and the financial lights going out around the world). Lloyds, which had originally said it would join the scheme, now says it won’t need to thanks to the money raised and the improving economic outlook.

Q. So what’s the total given what we’ve already put in?

Not including the asset protection scheme (which the tax payer might not need to pay out on) all this brings the total amount of money made available to support these two banks to £74.2bn.

Q. And what do we get out of this?

In terms of money: both banks will have to pay fees. Because Lloyds always had the asset protection scheme available and was originally going to join the EU says it has in effect received state aid. It will therefore have to pay a £2.5 bn “break fee” to the Government. RBS will have to pay a premium of £700m a year for the first three years and then £500m a year after that. The company will also need to stump up £2.5 bn when it leaves the scheme, which the bank says it plans to do within the next four years. The Government will take a £130m fee for underwriting Lloyds’ rights issue. It will hold, on our behalf, a 43 per cent stake in Lloyds after the rights issue (the same as before). For the capital injection into RBS, the Government will receive non voting “B” shares which will take its total interest in the bank to 84 per cent (from 70 per cent at present).

Q. Anything else?

Because of the help Lloyds and RBS have received the EU says they must break themselves up. RBS will sell off RBS branded branches in England and Wales and NatWest branches in Scotland. There are 318 in total and they will form a new bank which will likely trade under the resurrected Williams & Glyn brand. Direct small and medium sized business customers will also go, together with the bank’s insurance businesses including Direct Line and Churchill. They may be floated on the stock exchange. Global Merchant Services, a card payment business, and Sempra Commodities, a leading global commodities trader, will also be sold. Lloyds will sell its Cheltenham & Gloucester mortgage branches, Lloyds TSB Scotland and 280 branches Lloyds branches in Britain. In total 600 branches will go along with the Intelligent Finance internet bank. The TSB name will go with them, forming the second of three new banks the Treasury wants create. All these sales must be completed after four years.

Q. What about bonuses?

This is the good bit. Both banks have had to agree not to pay any cash bonuses in 2009 to staff earning more than £39,000 (although they can pay in shares). The directors of both banks will also defer all bonuses payments due for 2009 until 2012, to ensure that their remuneration is “better aligned with the long-term performance of their banks”.

Q. That’s good right?

Up to a point. Telephone number bonus payments have always been a rarity at Lloyds, whose business is focussed on retail and commercial banking. So it won’t suffer too much from this. Not so RBS, and the bank will now almost certainly lose staff to rivals such as Barclays, HSBC and foreign banks which do not face the same restrictions on what they can pay staff. Investment banking was the one bright spot in what were otherwise poor results from RBS at the half year stage. It might not be so for much longer after this.