Taxpayers were hit for at least another £28.7billion yesterday as two state-backed lenders unveiled break-up plans on a seismic day for the UK banking sector.
Royal Bank of Scotland and Lloyds Banking Group will have to shed more than 900 branches to ease European competition concerns over the vast state support given to them in the past year.
The disposals, which could take up to four years, will put around 10% of the UK retail banking market up for grabs for smaller players or new entrants.
The banks’ £39billion lending commitments to homeowners and businesses remain unchanged while they have had to agree to new rules on staff bonuses to secure the extra billions being pumped in.
Taxpayers have already paid out £37billion for shares in the two banks since the crisis began although Lloyds paid back more than £2billion in the summer.
RBS will also have to sell its Churchill and Direct Line insurance arm as well as parts of its investment banking business. It is putting £282billion in toxic debts into a taxpayer-backed insurance scheme.
The government is pumping an extra £25.5billion into the bank under the plans – with a further £8billion ready if needed – taking its stake to 84%. RBS will also be able to claim tax write-offs on its losses worth a potential £10billion.
Lloyds is paying £2.5billion to avoid the scheme but the Treasury is shelling out £5.7billion to support a record £13.5billion rights issue launched by the bank, which will remain 43% state-owned. The bank has been able to raise the funds due to a “stabilising” UK economy but has 2.8million private shareholders who will not receive dividends for at least two years.
Chancellor Alistair Darling said the plans would increase competition and represented a “better deal” for the taxpayer.
The taxpayers’ potential exposure has been cut by more than £300billion mainly due to Lloyds pulling out of the asset protection scheme.
But shadow chancellor George Osborne said: “There is still no guarantee that today’s plan will get credit flowing in the economy.”
The two banks will not pay discretionary cash bonuses to any staff earning above £39,000 for this year, although deferred shared bonuses will still be paid.
Lloyds chief executive Eric Daniels said: “Rewards have to be taken over the same sort of timeline as the period of risk.”
But unlike Lloyds, RBS boasts a significant investment banking business where huge payouts have long been the norm. Chief executive Stephen Hester said the bonus restrictions was “one of the additional obstacles that makes our job of recovering money for the taxpayer more difficult, although I completely understand the rationale for it”.
Lloyds will sell at least 600 branches, or about 4.6% of the total market share of UK current accounts, taking its market share to around 25.5%. But it avoided tougher sanctions by pulling out of the APS.
RBS is selling 318 branches of the former Williams & Glyn’s outlets in England and Wales and its NatWest branches in Scotland. These represent 14% of its UK network and will reduce its retail market share by 2%. Its share of the small business banking market will fall by 5%.
Unite warned that up to 25,000 jobs were at risk because of the government’s plan to sell off parts of the banks, and called on ministers to save jobs rather than securing the best price for the banks’ assets.
National officer Rob MacGregor said: “Any potential buyers should be assessed on their commitment to job security and protection of terms and conditions, not short-term profits.”
Meanwhile, taxpayers are already around £10billion down on its current stakes in the banks. RBS tumbled 10% yesterday although Lloyds edged higher on news that its bad debt issues were easing.
Hargreaves Lansdown equities analyst Keith Bowman said the selloffs were potentially good news for UK consumers although “the story of the banks is far from over”.