Banks face a week of reckoning

Britain's banks face one of the most crucial weeks in ther history with sell-off plans for Lloyds Banking Group and Royal Bank of Scotland assets to be finalised, just as the financial regulator begins scrutinising City bonuses.

Alistair Darling is expected to say on Tuesday that Lloyds will not be entering the Government's toxic asset-protection scheme, after successfully gaining support for a £21bn capital-raising with City investors, including a discounted £13bn rights issue. "When Win Bischoff floated the rights issue a while back, it was greeted with scepticism, but he and his advisers look to have pulled it off," said one leading shareholder.

But Lloyds may have to pay as much as £2.5bn to get out of the de-facto cover it has received for the past year.

Meanwhile, the Royal Bank of Scotland's chief executive, Stephen Hester, is believed to have continued negotiations with Treasury officials this weekend over its participation in the Government's insurance scheme.

Mr Hester is thought to be furious at the hardline stance being taken on RBS by the Government, which could be forced to sell off risky overseas investment banking operations.

The European Competition Commissioner, Neelie Kroes, has also drawn up a list of assets it wants RBS to sell in return for the billions of bailout cash the bank received from the Government to stave off its collapse.

RBS was revealed last month to be already exploring options to sell off its Churchill insurance business through a flotation, despite having claimed its insurance assets remained core to the bank and were not up for sale.

A source close to RBS said: "Everyone knows some assets will have to go, but the extent of the sales being asked for by the Government and Europe feel rather draconian. Lloyds seems to be getting its payoff from the Government for bailing out HBOS last year."

Twenty-six British banks have until Monday to submit plans to the Financial Services Authority (FSA) detailing how they will structure remuneration policies for staff, after a flurry of criticism about bankers' bonuses.

The FSA's chairman, Lord Turner, has warned that banks face having to put aside billions-worth of capital if they continue to flout a code of conduct on pay agreed earlier in the year.

However, a recent poll of executives reveal that most expect bonuses to match or better last year's, while one in 10 predict their best ever payout. The Centre for Economics and Business Research said last month that annual City bonuses are likely to jump by 50 per cent on last year, reaching £6bn.