Banks broken up: Q&A

Three new banks are to appear on Britain's high streets as part of a major break-up of the sector to be announced by the Government this week, The Sunday Telegraph has learned.
Why is the government doing it?

Gordon Brown and Alistair Darling have little choice. Under European law, Royal Bank of Scotland (RBS), Lloyds Banking Group and Northern Rock have to pay a price for the billions of pounds of state aid they have received. However, there are likely to be smiles rather than frowns in Downing Street because gradually returning these troubled institutions to full private ownership is firmly on the to do list. The government’s stakes in RBS and Lloyds are also threatening to become an even bigger political headache should these banks shower their best performing staff with bonuses in the New Year. Expect to see the emergence of Williams and Glyn, the revival of TSB and the resuscitation of Northern Rock hailed by the Prime Minister as a return to an era of more sensible and conservative banking.
Who will own these new banks?



We know who the Government do not want to own the new High Street banks but less about who could be favoured. Hoping to introduce more competition and stability into the market, ministers will not encourage bidders with big UK presences such as Barclays, HSBC and Spain’s Santander, which subsumed Abbey National, Alliance & Leicester, and Bradford & Bingley during the financial crisis. Likely candidates are therefore new or fledgling entrants into the banking market or foreign groups with substantial operations in other countries. It is thought that supermarkets or other retailers with interests in building current account facilities such as Tesco, Sainsbury’s, Boots, WHSmith or Sir Richard Branson’s Virgin Money, could make bids. Building societies, co-operatives or other financial services institutions could also be in the running.

Is it good news for the taxpayer?

At the Labour party conference, Mr Brown pledged to make last October’s dramatic bank bail-out pay for the average UK taxpayer. The government remains tight-lipped about the sort of prices these new banks may be sold for, but it is highly unlikely to be enough to cover the cost of the intensive care the banks have been in. RBS and Lloyds received a capital injection of £37 billion, and that is before counting any losses that might eventually land on the taxpayers’ doormat from the government insuring billions of pounds of the most toxic assets of RBS. The government will hope that the sale of these banks will go at least some way to recouping some of the billions spent at a time when the public finances are in such a parlous state. But with the sales not happening before the next general election, the taxpayer will have to wait.

What will the new High Street look like?

Since the onset of the crisis, the big banks have been furiously consolidating branches and closing stores with the loss of thousands of jobs. The rise of internet and telephone banking as consumers seek convenience, and banks try to cut costs, has also led to the slow demise of the High Street bank manager that knows the name of every customer. But the revival of two historic brands associated with personal banking, Williams and Glyn’s and TSB could herald a return to the importance of a High Street presence. If the Government manages to generate more competition in retail banking, branches may once again vie for prize spots in town centres.

Is it good news for consumers and businesses?

In economic textbooks, more competition is usually deemed to be good news for the customer. It is likely that the new entrants will seek to improve on existing retail services as they try to win customers. However, smaller banks focused on the nuts and bolts of consumer and business banking are also likely to be less profitable institutions and that may come at the public’s cost. There may be more choice, but it is not clear if banking services will be any cheaper. The Government’s plan to force Lloyds and RBS to hand out more mortgages and loans to businesses has so far delivered mixed results. The banks argue that there is little appetite for loans from either consumers, who are cutting their spending, or businesses fearful of investing in this economic climate. When these new banks are sold by the government, compelling them to lend gets even harder. Ultimately, the pace of lending to the wider economy is likely to depend more on a broader recovery in Britain.

Will it improve the stability of the financial system?

The speed with which the financial system unravelled still remains shocking a year on. So these new entrants in the British banking universe are likely to be focused on the basics: providing current and savings accounts as well as lending to home owners and businesses. What’s more they will only be lending what they get in from depositors – a model far removed from the old Northern Rock and HBOS when they relied on their own borrowing to plug the gap between what they handed out in loans and what they had in the bank. That certainly ticks a box for financial stability. However, this week’s announcement from the Government will not really address the 'too big to fail’ question that is at the heart of the future shape of banking. Big banks, such as Barclays and HSBC, still provide the very basics like current accounts and savings accounts but at the same time own investment arms engaged in far riskier and typically more profitable activities. What’s more, there’s nothing to stop a big foreign institution like Bank of America buying one of these new banks