• Darling's plan dependent on huge financial outlay
• Chancellor accused of policy U-turn by Tories
Alistair Darling will need to pour up to £40bn of taxpayers' money into the banking system if he is to fulfil a pledge to carve out three new banking players on the high street in the next four years.
A formal announcement from the chancellor on the new shape of the banking industry is expected as soon as Tuesday and will give a clearer picture of the commitment from the taxpayer needed to execute the plans imposed upon the government by Brussels.
The EU is demanding branches be carved out of Royal Bank of Scotland and Lloyds Banking Group that will be sold to new entrants and operate alongside a rejuvenated Northern Rock, creating three new banking players in an industry that was becoming dominated by a handful of high street names.
It was proclaimed by Darling today as a way to inject new competition into the sector and help the taxpayer get a return on its existing investment, but the Tories seized upon the apparent U-turn in policy. "When we called for smaller banks six months ago the Treasury dismissed our calls as being on the wrong side of the argument. Now they are being forced into it by the EU," said Mark Hoban, shadow financial secretary. "Now they have accepted our case for smaller banks, we need a full-scale Competition Commission review of the retail banking sector."
For the three new players to be spun out, taxpayers will need to put fresh funds into all three banks. The biggest injection will be into RBS, which has been earmarked to receive as much as £26bn in an intricate arrangement that could require the taxpayers' stake to rise from 70% to closer to 85% as result of participating in the government's toxic insurance scheme.
Lloyds Banking Group will need up to £7bn so that the government can maintain its stake in the group at 43% if the bank goes ahead with a plan to issue more shares, raising cash and allowing the bank to avoid buying insurance through the so-called asset protection scheme.
Northern Rock is to be loaned an extra £8bn so that it can be split in two, as sanctioned by the EU last week, and become an active mortgage lender again.
The £40bn estimate is subject to change and will be finalised once the delicate negotiations with the EU are concluded in the coming 24 hours.
Darling made no mention of the extra funds when he told the BBC's Politics Show today that the new-look banking sector would take up to four years to achieve. "I'm determined that because the taxpayer put a lot of money into stabilising the system the taxpayer is entitled to get that money back," he said.
After the state aid granted to the three banks since the financial crisis erupted two years ago, the EU has conducted a review of banking competition, and particularly the government's scheme to insure toxic loans. RBS, already the recipient of £20bn of taxpayer funds for a 70% stake, is also being forced to embark on a radical restructuring under which it will have to sell 300 or so branches under the Williams & Glyn's brand, last seen two decades ago. It is also being forced sell off its insurance arm, Churchill and Direct Line, and last night was battling to convince the EU that it should not be forced to sell off Citizens, its retail operations in the US.
A source close to RBS said the bank felt "bruised" by the demands from the EU, which will force chief executive Stephen Hester to tear up the business plan he announced in February just four months after he replaced Sir Fred Goodwin.
RBS is also still negotiating the precise amount of capital it needs and may be required to have more "contingent" capital that it can call upon should its balance sheet deteriorate. While the outcome of the discussions is expected on Tuesday, in February the government admitted it might need to put £26bn into the bank and it is possible this sum may rise further.
Lloyds is expected to leave the asset protection scheme altogether by conducting a cash call and asset sales to raise a total of £25bn. An estimated £7bn to be used by the taxpayer to buy shares will be partly negated by a £2.5bn fee charged by the government for insurance from the asset protection scheme but not yet paid for.
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