Government set to break up 3 high street banks
02 November 2009
Government set to break up 3 high street banks
02 November 2009
The Chancellor, Alistair Darling, is expected to confirm this week that three UK banks, which are currently supported by the taxpayer, will be broken up and parts of their businesses sold on, say Moneysupermarket.com
Which banks will be affected?
The banks in question are Northern Rock, which was nationalised in February 2008, Lloyds Banking Group and Royal Bank of Scotland (RBS) which are both majority owned by the government and hence us as taxpayers.
What will be proposed?
The exact details have yet to be confirmed, but it is widely expected that the Chancellor will announce a plan to divide Northern Rock into what is effectively a 'good' bank and a 'bad' bank. The good bank, which will include its savings book, mortgages and branch network, will be sold on, while the government will retain ownership of the 'bad' bank. This comprises of Northern Rock's bad debts, such as mortgages, which are in default. By stripping the toxic assets out of the business it will make it more attractive to potential buyers and therefore more valuable.
The future shape of Lloyds and RBS will be slightly different. Neither bank has been fully nationalised but as majority shareholder the government has a big influence on the way the businesses are run. As such, it is likely to announce that certain parts of each business are sold off to reduce the size of the banking giants.
The reforms may see Lloyds selling off brands including Cheltenham and Gloucester and Intelligent Finance. The break-up of RBS could see it having to sell off its insurance business, which includes Direct Line, Churchill and Green Flag; and NatWest branches in Scotland.
Why is this happening?
The government will say that the main reason for these reforms is to return money to the taxpayer as quickly as possible. Billions of pounds of taxpayers' money has been used to shore up Britain's banking system and stop it from collapsing.
However, while this is a factor it is not the only reason for breaking up the banks. The government has been under huge pressure from the European Union to instigate reforms to the banking system to boost competition.
Ordinarily, the merger of Lloyds TSB and HBOS wouldn't have been allowed under competition rules. It was only approved by the government because of the banking crisis. However, as a result, Lloyds now controls 30% of the current account market.
Competition has been further eroded by other mergers that have resulted from the financial crisis: Santander, the Spanish bank that owns Abbey bought Alliance and Leicester and Bradford and Bingley's savings book; Nationwide Building Society bailed out Cheshire, Derbyshire and Dunfermline building societies. There have also been numerous other building society mergers.
The break-up of Lloyds, RBS and Northern Rock may help boost competition among the high street banks which, in turn, should be good news for the consumer.
