Major Changes in UK Banking Sector – New, Smaller Banks to Hit the High Street

by Karl Hindle – London UK

The UK is set to see smaller banks commence business on the High Street with the government spinning off banking assets acquired during the financial crisis while compelling larger banks, such as Royal Bank of Scotland (RBS) and Lloyds, to hive off subsidiaries.

Alistair Darling, Chancellor of the Exchequer is set to make the announcement this week.

Since Mervyn King, Governor of the Bank of England, made the statement that if a bank was considered too large to fail then maybe it was simply too large, the UK has firmly moved down the road of breaking the hold of large banks on the UK economy.

The result will be more choice and greater competitiveness for British customers but the implication is much wider than that. It is clear that there has been more than an ignition of the Glass-Steagall debate, this is more akin to implementation whilst the major UK banks are in a weakened and dependent state.

Lloyds acquired the Trustee Savings Bank (TSB) but this will now rise, phoenix-like from the ashes, along with Williams & Glyn's which was acquired by NatWest in the 1980's (and is now owned by RBS which in turn is majority owned by the British taxpayer). A third bank will also be created from the remnants of Northern Rock though what it will be called is unknown at this stage.

The announcement on the three new additions to Britain's banks will be made this week by Alistair Darling, the Chancellor of the Exchequer. Lloyds is also compelled to sell Cheltenham & Gloucester (C&G) and its online banking business, Intelligent Finance, whilst RBS must dispose of NatWest branches in Scotland and form the new Williams & Glynn's in England using its NatWest branches there.

No company which holds a major stake in a retail British bank will be allowed to acquire any of the assets in a move which is clearly aimed at breaking the established retail oligopoly.

Currently, the following banks dominate the British retail banking scene – Abbey (owned by the Spanish Santander), Barclays, HSBC, RBS and Lloyds.

Prospective purchasers are thought to likely come from the US, Australia and the Middle East.

It is not simply the banking operations which are being broken off but ancillary businesses such as insurance arms – Lloyds is being allowed to keep Scottish Widows, but RBS must dispose of Churchill, Green Flag and the highly successful, Direct Line. What will become of RBS's US retail venture, Citizens, is unknown at this time – RBS's CEO, Stephen Hester certainly made his position clear that Citizen's is essential to RBS's core future, but Neelie Kroes, EU Competition Commissioner appeared unimpressed last week.

RBS is between a rock and a hard place – it cannot raise the billions required to recapitalise and get from under the Government thumb (70% of RBS is owned by the British taxpayer).  

Impetus for the Government decision has been given by the EU which has been very firm on its position with banks who have received taxpayer money. RBS had several proposals shot down by the EU Commission last week (not simply the Citizen's arguments) while Lloyds announced a £21 billion rights issue in an effort to extricate itself from the UK Government's Asset Protection Scheme (APS). RBS had already sought to gauge investor appetite for an issue, but it has no realistic ability to raise the capital needed – it is going to be much smaller when the asset disposals are made which are anticipated to be end of summer 2010.

An issue for UK taxpayers is just how much is going to be raised. The amounts will be substantial and no government officials are saying anything, but after pumping so much money into bank bail-outs, which were not supported by the Conservative opposition, if capital losses are incurred it will not look good for Labour and Prime Minister Brown in the forthcoming elections.