Bill Jamieson: Break-up will affect course of the UK's financial industry for years

Published on Sunday 1 November 2009 21:13

FROM solvency crisis to government rescue to regulatory horse-trading – and soon a bewildering game of pass-the-parcel with three new parcels to a vetted list of players: is there any twist left in the British banking drama that can still spring a surprise?

Yes – it could see the emergence of a Scottish buyer for the Lloyds TSB branches in Scotland that are likely to be up for sale. In a deeply ironic twist, investment banker Ben Thomson could already be rounding up Scots businessmen to put in an offer for these non-HBOS outlets.

Thomson is close to First Minister Alex Salmond and such a move would enjoy strong moral support from the administration.

In UK terms, it certainly cannot spring more humiliation, not just on Lloyds Banking Group and Royal Bank of Scotland, but also on the government and in particular the UK competition authorities.

They have been totally sidelined in the negotiations on the future of Britain's two banking giants.

Remember that it was Prime Minister Gordon Brown, Chancellor Alistair Darling and then trade secretary Lord Mandelson who first put the Humpty Dumpty of the enlarged Lloyds Banking Group up on the wall.

They waved aside UK competition law and made sure the appeal tribunal overrode all objections to the Lloyds-HBOS "merger" barely a year ago.

Now Humpty Dumpty is to be broken up, courtesy of the formidable Neelie Kroes, the EU Competition Commissioner.

Now Mr Darling will struggle this week to present the necessity of compliance with Ms Kroes as his own virtuous solution.

The divestments will mark a profound change in the dynamic and direction of British banking for years to come. After decades of relentless expansion and acquisition, this process is now thrust into reverse. The hope is that more competition will bring greater choice for the consumer and address the "too big to fail" conundrum that compelled an unprecedented set of government interventions last year.

One likely result of the coming upheaval will be the emergence of supermarket giant Tesco as a big force in UK retail banking, with possibly Virgin and overseas banking groups securing a presence in the UK. But searching questions are left hanging.

First, the government will almost certainly have to place restrictions on existing groups such as Barclays and HSBC from buying the businesses to be disgorged and may need to resort to a blocking "golden share" to prevent the new banking businesses being vacuumed up by an overseas predator.

Second, more bank groups do not necessarily mean different or innovative new products and services.

Third, it raises big questions on the future size and role of head office functions in Scotland of RBS and Lloyds Banking Group.

Finally, it does not yet resolve the controversy over the separation of retail and investment banking operations.