Lloyds and HBOS 'may be demerged'

THE commission investigating the structure of Britain's banks may recommend the unwinding of the merger between Lloyds and HBOS.

• Lloyds Banking Group

Clare Spottiswoode, a member of the Independent Commission on Banking, set up by the coalition government, has hinted strongly that reversing the controversial tie-up is among its options.

The ICB was asked to look at breaking up the banks but this is the first indication from one of its members that the Lloyds-HBOS merger could be unravelled.

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The deal, conceived two years ago and completed last year, has been among the most contentious in recent years.

It has survived threats from the European Commission and remains a big concern among those fearful of its dominance of British banking.

Spottiswoode, a former gas market regulator, told an audience in Leeds that the merger would be revisited. "We might suggest reversing what happened on that day a few months back when Lloyds took over another bank," she told a public meeting organised by the ICB.

She told her audience that the ICB was looking into increasing competition in the banking sector and said that Britain did not have a healthy competitive market in financial services.

She was concerned by what she called high barriers to entry for new banks and felt that regulators had not done enough to tackle the problem.

Her comments will reopen debate in Scotland, where the merger with Lloyds continues to be a major talking point. Some believe the government should have taken action that would have allowed HBOS to retain its independence, and there were a number of attempts to save it, or part of it.

Others felt that the requirement to pump billions into the bank every day in order to service its loan book was an unreasonable burden on the taxpayer.

A merger with another bank in the fevered atmosphere of the time was seen by the Labour government as the best way to stabilise the sector and retain most of the core business and jobs. The competition rules were waived by Prime Minister Gordon Brown in order to rush through the Lloyds deal.

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But opponents of the merger continue to question whether it was the right thing to do and remain concerned at the cost of the merger to Scotland's status as a banking centre.

Sir George Mathewson, former chairman and chief executive of the Royal Bank of Scotland, told Scotland on Sunday last week that HBOS should have been given time to find an alternative solution.

He said that he expected to be called to give evidence to the ICB and said he will want to say something about the Lloyds-HBOS merger.

Lloyds is downsizing parts of its business as a condition for accepting the government's bail-out money. The Lloyds TSB branches in Scotland will be sold.