Darling prepares to unveil bank shake-up

Chancellor Alistair Darling will this week unveil his proposed overhaul of the UK banking system which includes breaking up Lloyds and Royal Bank of Scotland and bringing "at least" three new banks to the high street.

Mr Darling is preparing to announce the Government's plan for the future of UK banking – as first revealed in The Independent last week – to the House of Commons in the next few days.

The Government is not yet ready to announce as it is still in negotiations with the two banks over their participation in its Asset Protection Scheme (APS), designed to insure billions of pounds worth of bad loans.

The Chancellor said yesterday there would be a very different look to the high street banks in the next four years.

He said: "What I want to do now is begin the process of reform and reconstruction so we have got a safer, more competitive banking system with more high street banks than we have at the moment, with new entrants coming in". RBS, which is 70 per cent owned by the Government, and Lloyds, 43 per cent state-owned, will be forced to dispose of a string of assets, which will be sold to new entrants to the market.

The two banks "will be divesting some of the holdings they have at the moment. What you really want to do is have substantial divestment of branches, or particular institutions they own, made available to other people," Mr Darling said. This follows pressure from the European competition commissioner, Neelie Kroes, who has demanded that RBS and Lloyds sell operations under the EU's state aid rules.

He added: "I would hope that you would have perhaps three new entrants over the next few years. You know, some are already in banking, others may decide it's something they want to get into." Virgin Money is understood to be monitoring developments closely, and Tesco is believed to be interested in boosting its financial services operations with assets from the Lloyds and RBS.

Banking giants Barclays, HSBC and possibly Spain's Banco Santander, which owns Abbey, Alliance & Leicester and branches of Bradford & Bingley, are likely to be blocked from bidding as the Government is "determined" to see more competition in the wake of its £1.2 trillion bailout of the sector. The British Banking Association said more competition among the consumer banks would mean better service for customers.

RBS is preparing to sell its Churchill and Direct Line insurance businesses, investment banking operations, and a "couple of hundred" NatWest branches in Scotland. It is determined to hold onto Citizens Financial Group, its US retail banking arm.

It remains in talks with the Government over participation in the Asset Protection Scheme, which is likely to see the taxpayers pump a further £19bn into the bank. The move to invest through an issue of "B" shares would bring the government's stake up as high as 84 per cent.

Lloyds, however, looks set to have avoided participation in the scheme, as it secured backing from some of its biggest shareholders for a rights issue set to raise between £13bn and £15bn.

This forms part of a larger fund- raising package which will include a debt-for-equity swap and asset sales. The asset sales include divesting TSB, Cheltenham & Gloucester and online arm Intelligent Finance. Lloyds will see its share of the retail banking market fall from 30 per cent to 25 per cent in the UK as a result.

Mr Darling emphasised yesterday that the Government would only divest its stakes in the nationalised banks "when the time is right".

The EU last week approved the plan to split Northern Rock into a "good" and "bad" bank which is set to be finalised by the end of the year. This would bring a new entrant about £20bn of deposits and a portfolio of low-risk mortgages. Mr Darling said "We're now in a position where we think we can sell off the profitable part of the bank and we can manage down its remaining assets over a period." He added: "I'm not interested in the fire sales. I will only sell when the conditions are right and when we get our money back."