Showdown as EU and UK battle over banks

Author: By Margareta Pagano, Business Editor

City sources said: ?The Government is terrified that the EU is getting ready
to issue an ultimatum over Lloyds and RBS, forcing them to break up
following the massive state injections of capital last autumn. This row is
heating up and is likely to come to a head quite soon.?

Urgent negotiations are taking place between the Treasury, UKFI, the agency
which controls the Government?s shareholding in Lloyds, and the EU. Treasury
sources said they hoped that some sort of deal could be thrashed out ahead
of the August deadline set by the EU.

Lloyds has already conceded that it may have ?to divest or exit core
businesses? and has a plan to sell-off or stop some activities. But analysts
are worried about selling in such a depressed market.

Meanwhile, a two-horse race has emerged over who should take over as the new
chairman of Lloyds to replace Sir Victor Blank when he steps down next year.
UKFI is backing Sir Win Bischoff, the former chairman of Citigroup, while
Eric Daniels, the chief executive of Lloyds, is keener on Chris
Gibson-Smith, the current chairman of the London Stock Exchange.

EU competition commissioner, Neelie Kroes made it quite clear last week at the
British Banker?s Association conference in London, that she would push
through the restructuring: ?The massive aid received by banks such as Lloyds
and RBS allows these banks to remain leaders in markets which are
concentrated. The likelihood of significant divestments by RBS and Lloyds is
strong.?

The Government pumped more than £37bn into the banks, leaving it with 70 per
cent of RBS and 43 per cent of Lloyds.

Ms Kroes, who is renowned for her tough stance on EU companies taking state
aid, said: ?[RBS] is not a bank with a sustainable business approach. This
bank was not merely too big to fail. It was too big to supervise, too big to
operate, too complex to understand, and highly dangerous to the European
single market.?

After the HBOS rescue, Lloyds has more than 30 per cent of the retail banking
market, and a 28 per cent chunk of mortgage lending, while RBS?s
concentration is in the UK small- and medium-sized enterprise and
corporate-banking markets.

But Ms Kroes restated that the state aid approval process ? which the UK has
to have from the EU ? means that the banks will have to be restructured.

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