David Prosser: Labour puts the banks up for sale

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The Independent Online

Outlook Mervyn King should be pleased. Having complained bitterly last week that Britain's banking industry is hopelessly uncompetitive – and repeated calls for the break-up of the biggest institutions – the Governor of the Bank of England sees the Government move his way today. The Treasury will promise to create three new banks from parts of Northern Rock, Lloyds and Royal Bank of Scotland, and while that may not be quite the degree of bank demolition to which Dr King aspires, competition should be a beneficiary.

We do not yet know the full detail, but it is clear none of the biggest banks will be able to bid for the assets to be sold. That leaves the field clear to the Tescos and Virgins of this world – both will almost certainly bid – and to players as yet unknown.

For Lloyds and RBS, this is a blow. Neither had expected to be told to sell off so many branches – and in Lloyds' case, to give up market share of 5 per cent – and both will fear new entrants to their markets. Tesco, in particular, threatens to become a formidable competitor.

The biggest opportunity of all, however, is for Gordon Brown and Alistair Darling. Britain's financial crisis began with Northern Rock, so the sale of a sizeable chunk of the bank back to the private sector is a real moment for them. They will say they have nursed the banking sector back to health, rewriting the rules of competition in the process.

Never mind that we still do not know what the final bill for Northern Rock will be, let alone for the wider bail-out (the taxpayer may yet lose billions or turn out to have made a profit). For the Government, selling Rock – and being seen to put its stakes in Lloyds and RBS to good use – represents a decisive move towards closure. Crucially, that move is being made this side of the election.

It seems unlikely this will be enough to turn the political tide in Labour's favour. And there is the danger that selling off banking assets in the current market, rather than waiting until a time when a higher price might be achievable, means taxpayers miss out. But these sales are the bare minimum necessary for the Government to go on credibly claiming that it has lead the way in its response to the financial crisis.

Still, there are plenty of spanners lurking to mess up the works. It is not clear, for example, whether the Government is doing enough to appease the European Union, which is probing the merger of Lloyds and HBOS. RBS and Lloyds may also try to frustrate these efforts. And, of course, credible buyers are needed.

Still, this is a genuine turning point. Having dealt with the financial panic of a year ago, we've spent much of this year trying to work out how to cope with the fall-out. Now we're moving on to the exit strategy.