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LONDON – The British government moved Tuesday to break up the country’s two biggest retail banks, imposing a major shake-up on the financial sector as it exacts payback for last year’s massive state bailout at the height of the financial crisis.
The government also injected billions of dollars more of taxpayer money into Royal Bank of Scotland PLC and Lloyds Group PLC, underscoring worries the banking sector is not out of trouble yet.
The change effectively pumps almost $65 billion more into the two banks and could result in the creation of as many as three new commercial banks.
The move to make the banks sell off some of their businesses comes at the insistence of European regulators to ensure competition in the banking industry after the government’s initial rescue package last October.
The British government also extracted promises from Royal Bank and Lloyds for new restrictions on bonuses to align pay with long-term performance, reflecting demands from disgruntled taxpayers that the previous culture of big payouts based on short-term gains – and excessive risk taking – not be allowed to continue.
“These changes are better for the taxpayer, better for the banks, and better for the economy,” Treasury chief Alastair Darling told lawmakers. “They will mean stronger and safer banks better able to support the recovery.”
But the plan raised eyebrows by more than doubling the money that the government has invested in the British banking system, one of those hit hardest by the global credit squeeze. The Royal Bank bailout now exceeds the $45 billion given by the U.S. government to each of Citibank and Bank of America.
The plans to reduce the size of the banks come amid an international debate about whether large banks should be broken up to prevent “too big to fail” syndrome.
