Bank sell-off jigsaw becoming clearer

By Douglas Fraser
Business and economy editor, BBC Scotland

Europe's Competition Commissoner has set tough conditions on state aid

Talks have dragged for months on breaking up the banks that rely on British government bailout.

There's been lots of speculation of what could be sold.

That information has been like bits of jigsaw, and it's only now the picture is becoming clearer.

That's because the pressure's on. The banks want to restructure their finances by the end of the accounting year.

The European Commission, including competition commissioner Neelie Kroes, steps down in the next few weeks.

She wants to use her power to place conditions on state aid as a means to drive more competition into British banking, just as she's done in Germany and the Netherlands.

And the Chancellor, Alistair Darling, wants to announce a deal on Tuesday for both Lloyds Banking Group and Royal Bank of Scotland.

Lowering risk

The picture emerging so far has two dimensions, which have to fit together.

These talks have been described as highly delicate, intense and even brutal.

Government to set up bank chains

One, scaling down these high street giants, and the other, the Government Asset Protection Scheme (GAPS) which was intended to provide government insurance against losses on more than £600bn of these two banks' most troubled assets.

On the scaling down, Lloyds is likely to market Cheltenham and Gloucester, Lloyds TSB Scotland and Intelligent Finance, an online division.

RBS is expected to sell or float its insurance division, including Direct Line, Churchill and Green Flag.

Around 300 RBS-branded branches in England, with big strengths in smaller business finance, face being sold as Williams and Glyn Bank, a brand RBS dropped in 1985.

The Edinburgh-based bank is also under pressure to shed some of its investment banking units, lowering the risk carried by taxpayers.

Rights issue

Downing Street wants to make sure up to 700 branches coming on the market don't become part of already gigantic rival banking chains.

The government has a 43% stake in Lloyds

It wants to attract newcomers, to boost competition. That's despite the most significant innovations coming from banks that ignore the high street and mainly operate online.

On GAPS, Lloyds has approval to seek a bigger capital base from its shareholders, as a means of getting out of the expensive premium and unwelcome conditions attached.

A rights issue looks imminent. Its £2.5bn exit fee from GAPS is more than double the figure it first proposed and will be paid in shares.

That's because the government, as 43% owner of Lloyds, is to take part in the rights issue but it wants to do so without committing new money.

RBS will still be in the scheme. But the amount insured will be less than planned, down from £325bn to around £280bn.

The bank won't pay an upfront premium but will negotiate a pay-as-you-go fee, depending on market conditions.

RBS would have to pay the first £60bn of losses - much higher than previously planned.

That effectively makes this insurance only against catastrophic meltdown.

Crucially, RBS has negotiated an early exit option, instead of being stuck in GAPS for five years. However, it looks unlikely it will get out of protection any time soon.

These talks have been described as highly delicate, intense and even brutal.

And it's being stressed nothing is agreed until everything's agreed.