British government downsizes bailed-out U.K. banks

By Anthony Faiola
Washington Post Foreign Service
Tuesday, November 3, 2009; 9:18 AM

LONDON -- The British government announced Tuesday that it will break up parts of major financial institutions bailed out by taxpayers, highlighting a growing divide across the Atlantic over how to deal with the massive banks that were partially nationalized during the height of the financial crisis.

The British government -- spurred on by European regulators -- is forcing the Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.

The move to downsize some of Britain's largest banks comes as U.S. politicians are debating whether American banks should also be required to shrink. The Obama administration has maintained that large banks should be preserved because they play an important role in the economy and that taxpayers instead should be protected by creating a new system for liquidating large banks that run into problems. But Britain's decision already is being cited by a growing chorus of experts, including prominent bankers and economists, who want the United States to pursue a similar approach.

"We still need to see exactly which parts the [British] banks will need to sell off to judge whether the goal of having smaller banks is really achieved," said Richard Portes, an economics professor at the London Business School. "But there are lessons here for the United States. The supposed economies of scale of massive financial institutions are outweighed by the difficulties in controlling risk inside them."

The changes amount to a massive restructuring of the British financial system, among the hardest hit by the global crisis, that could result in what the government has described as the creation of three new commercial banks. The Royal Bank of Scotland -- now 70 percent owned by British taxpayers -- announced Tuesday that it would sell off 318 branches in England and Wales, as well as sell its NatWest brand in Scotland, RBS Insurance, and Global Merchant Services, a credit card payment business, as a result of regulator demands. The sell-offs would pave the way for tens of billions of dollars more in previously announced cash injections from the governments.

Demands that more state aid be tied to downsizing appeared to be emanating most strongly from Brussels, where the European Commission has been pressing the British to shrink its massive banks. In a related move, RBS also announced plans Monday to trim 3,700 jobs, or 14 percent of its workforce, across the United Kingdom.

Lloyds, now 43 percent owned by British taxpayers, said it will sell at least 600 branches, including its TSB brand in Britain, the Cheltenham & Gloucester mortgage company and an online financial business, Intelligent Finance. The company avoided more massive sell-offs through a deal to raise billions of dollars in private financing, reducing its reliance on the government for fresh capital.

As part of the deals, both Lloyds and RBS agreed not to pay out any cash bonuses to staff earning over 39,000 pounds, or $65,500, in 2009.

On Sunday, Britain's chancellor of the exchequer (the equivalent of Treasury secretary), Alistair Darling, told the BBC that Northern Rock -- a British mortgage giant that became one of the first victims of the financial crisis -- would be split in two parts by the end of the year.

The banks' assets would be sold only to new entrants to the British banking market to ensure more competition. Among the potential bidders here are a major supermarket chain and billionaire Richard Branson, founder of the Virgin group. Darling told the BBC that the sell-offs would not amount to "a fire sale," adding that sales of some assets could take several years to ensure that taxpayers get a good return on their investments in the banks. "We need a safer, more competitive banking system," Darling said.

In recent weeks, European regulators have also forced other banks bailed out by European governments -- most notable ING in the Netherlands -- to sell off parts of their operations.

Britain and the United States developed similar banking systems over the past two decades, both encouraging the evolution of giant firms that sought to offer a range of financial services, from savings accounts to trading in derivatives. But in the wake of last fall's financial crisis, Britain has moved much more quickly and dramatically to reform its financial system. Its decision to invest directly in its largest banks to help them weather the crisis set a precedent for the U.S. bailout that followed.

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